For the past few weeks I’ve been having a critical look at my Harmoney investor account.
It has taken me a while to put this post together because I don’t like being negative about a business that I was feeling particularly enthusiastic about a year ago.
Harmoney have been operating for a year now and things have changed in that time.
The way I see it, Harmoney’s business model is flawed. It’s great for Harmoney themselves, but not so good for either borrowers or investors – particularly not good for investors!
Harmoney make their money by charging borrowers a fee for taking out a loan. This is fine, Harmoney are a business and I’d like to see them succeed. The problem with the peer-to-peer concept is that the interest on the loans is being paid to investors, so Harmoney don’t have any interest (pun intended) in placing good quality loans as there is no incentive for them to do so. Once the loan is placed, Harmoney have their profit and the money at risk is that of the investor.
The way I see it, there is no incentive for Harmoney to do a great job scrutinising creditworthiness of borrowers, or chasing non-payers. The fee that Harmoney make from investors is 1.25% of each repayment. This is not enough reward for them to look after their investors and I feel that as an investor we are placing huge trust solely in the honesty and integrity of the credit checking team.
Harmoney’s business model requires quantity, rather than quality to grow their profits and I feel that is a huge conflict of interest when the money at risk is not Harmoney’s, but that of their investors.
There are only a limited number of quality borrowers in New Zealand, and Harmoney are competing with the banks and all other finance companies for this market share.
My gut instinct is that the rewrites were brought in to boost Harmoney’s profit so that they could grow and expand. Unfortunately, alarm bells are ringing for me now because I am seeing loans that were originally $5,000 being rewritten at $15,000. Some of the amounts that people are borrowing are huge, up to $35,000. In many cases, the repayments on the loan take up to 20% of the borrower’s monthly income, and this is assuming that the borrower doesn’t also have debt to service somewhere else.
As my investments are being rewritten, I am withdrawing the funds. I initially started withdrawing because there was nothing suitable (debt consolidation loan, repayments less than 10% of monthly income) to reinvest the funds in, but now I’m withdrawing because I am losing trust in Harmoney.
I have heard that borrowers are receiving letters offering them a top-up (rewrite) and their creditworthiness is not being rechecked. One such case, the person had recently lost their job, but received a top-up offer of $30,000 to buy a new car. I feel that this is not responsible lending, and is only coming about due to Harmoney’s business model.
What can be done?
Perhaps Harmoney need to consider raising more revenue through repayment of loans, rather than just the issuing of loans? Perhaps Harmoney’s investor fee should be 2-3% of the interest rate paid by the borrower, rather than 1.25% of the repayment amount (which also includes the investor’s principal).
If Harmoney stood to lose more from loan defaults then that would result in more prudence in the issuing of loans, and investors would have far more confidence in placing their funds through the platform.
At the moment, I feel that this could be another case of ‘high interest, high risk’ – finance companies spring to mind..