Monday, 23 September 2019

Our Money Market updated user experience


In this post I wanted to give an update on my user experiences with Our Money Market from when I first started using the platform back in April 2019 (First user impressions here).  During this time I’ve continued to invest and grow my portfolio of loans on the platform, but it has not been without its challenges. 

I initially found the platform’s responses prompt, however since that time responses have slowed down where account inquiries and questions are taking weeks to get resolved. This is coupled with several prompts along the way to get to a satisfactory outcome.  When you consider a business like this, you need both investors and borrowers alike to have seamless experiences.  Unfortunately this has not been my experience to date.

While I appreciate the platform is still young, I found the user interface not as slick as other platforms out there offering the same service.  On multiple occasions, the platform appears to glitch and committed funds get “stuck” in no man’s land.  By this I mean funds committed to loans that do not proceed, disappear off the pending loans list (a list of the loans you have funded but not yet active), however the funds do not become available to reinvest.  You can see the missing funds are still linked to your account through the summary total of committed funds but is mismatched against what loans you can see as pending.  This is a problem I experienced multiple times with the latest issue taking almost four weeks and multiple follow-ups with Our Money Market to resolve. 

For me, one of the drawcards of Peer to Peer lending is the ability to become a low time commitment investment.  My experiences on Our Money Market have been different to this expectation.  While I didn’t take stats, it felt like a large number of the loans I committed funds to, did not proceed.  This occurred in two ways, majority being that funds were returned prior to the closing of funding window.  I believe this is because the borrower changed their mind about taking out the loan. The second was that the loan did not get fully funded by the end of the open funding window (typically 14 days), thus funds are returned.  This is a result of not enough investor activity.

Because of this I was spending a lot more time on the site to try and get funds invested than what I though was reasonable having to continually re-invest the same funds before I got a return.  The platform does have an auto invest feature that I thought would help reduce this time, so I set it up (something that is not a super intuitive process).  In the months auto invest was active, it did not make a single investment on my behalf.  While I continued to adjust setting, I still could not get it to work.  Feedback from Our Money Market was there was nothing wrong with the Auto Invest.

While I understand Our Money Market is still a young business, I feel I’ve been very persistent and patient working through the challenges with the platform expecting them to be resolved.  However based on the culmination of these experiences to date, I’ve decided to no long actively use this platform at this stage.  I recognise this is only my experience using Our Money Market, thus I am interested to here from other people who has invested on the platform and the experiences they’ve had.

Tuesday, 20 August 2019

Takeaways from the "Investing with RateSetter" Webinar



RateSetter recently held a webinar for investors. I took the opportunity to dial in to see if I could learn anything new about the platform.  The majority of the webinar went through the basics on how to make an investment on the platform.  In addition to this, there were a few points about the provision fund that I learnt which I will share below.  Furthermore, RateSetter presently are offering a referral offer where both parties can get a bonus $75 dollars.  If you want to access this offer, click here*

 While I thought I fully understood the provision fund, the Webinar taught me a few extra details about how the fund works.  The provision fund is designed to cover investors in the event of a loan default.  This pool of money is acquired through a risk assurance charge that every borrower pays when they take out a loan through RateSetter.  A higher risk borrower pays a larger risk assurance charge into the provision fund.  What I didn’t realise is that the provision fund (providing it is satisfactorily funded) will kick in automatically to cover both late payments and defaults to ensure the investor gets the returns on time.

At the time of writing this article the provision fund has $13.9 million verses an estimated bad debt of $8.9 million giving a coverage ratio of 156%.  Latest provision fund stats are available at this link.  While the coverage ratio is above 100%, defaults and late loan payments will be automatically covered out of the provision fund.

 Early access to funds in the 3 and 5 year lending markets become available a few months ago at a cost of 3%.  During the webinar it was highlighted that the fees have now been reduced to 1.5% which is a step in the right direction.  While I recommend you don’t take your funds out due to the fees reducing the returns you have received, I understand that unexpected things can come up. 

Finally, just a reminder that if are looking to invest in Ratesetter please use the following referral link to sign up.  *If you invest at least $2,000 in the 3 or 5 year lending markets and are one of the first few thousand new members to do so under this offer, we’ll both receive a $75 bonus. 

Tuesday, 6 August 2019

My First Loan Default


After almost a year of investing I’ve just experienced my first Peer to Peer loan that has defaulted with the borrower filing for bankruptcy.  I always knew this day would come, however I believe I’ve prepared well to wear whatever the final outcome may be.  The loan in question comes from my first investment platform TruePillars.  While this maybe my first default, having directly invested in over well over one hundred loans across multiple platforms, I’m confident I will experience it again. 

This particular loan I actually only purchased a few months ago on the secondary market and only received a couple of payments before the default.  While this is disappointing, we need to put this in perspective.  The investment only made up 0.2% of my TruePillars portfolio of just over one hundred loans and the total outstanding value of this loan is about a fifth of the interest I earnt last month on the other loans on TruePillars.

Having not gone through the process first hand, I thought it was a good time to go back over the process to understand the next steps.  From the loan dashboard the notes outline the borrower has petitioned for bankruptcy and as is now in a formal process we must wait for the bankruptcy trustee to provide an update.  For this particular loan, we were an unsecured creditor so we expect to incur a material write-off (i.e. expect to lose some or all of our investment outstanding).  From this point, it will sit on our list of loans until a final outcome is determined.  I’ll keep you posted on how that looks.

While this is the outcome of this loan, I see that TruePillars have several options available to them as described in the PDS (Product Disclosure Statement) to work with the borrower for the best outcome for all parties.  This may include extending the final maturity of the loan by up to three years (lower’s the monthly repayments of the borrower to improve business cash flow which will allow it to continue to operate).  If this does not seem like a viable option, TruePillars may agree to a partial payment in full and close the loan (with material losses) or assign it to a third party (again with material losses to investors).

This default has hammered home the point that diversifying your loan portfolio is extremely important to ensure you minimise your risk and enable you to remain profitable in the event of a loan default.  Although I have focused on the process of what happens from an investor point of view, I think it’s important to take a moment and acknowledge that this can’t be easy for the borrower.  In this particular case, it was a small business owner who has just lost their livelihood.  For me, it certainly puts it into perspective that all I lost was a small part of a larger income producing portfolio.

Wednesday, 24 July 2019

Understanding P2P interest rates and how they are set


With the Reserve Bank of Australia having recently cut the cash rate to a record low of 1%, I thought it prudent to delve into how Peer to Peer platforms set their interest rates and if the cash rate has an impact on the rates we can expect as an investor.  For this I will focus on three platforms, TruePillars, RateSetter and OurMoneyMarket and highlight the key points of the Product Disclosure Statements (PDS) around how interest rates are determined.

TruePillars

This platform focuses on loans to small and medium sized businesses with terms of up to 5 years.  Every application has an assessment completed to risk rank the application and assess if the business has the capacity to repay the potential loan.  This is done through a combination of quantitative and qualitative data supplied by both the borrower and third parties.  Some of the key data points that feed this rating include

  • External credit agency data and score
  • Industry sector & geographic region
  • Nature, size and age of business
  • Management team and track record
  • Financial statements and bank account data
  • Commercial invoice payment performance
  • Court Judgements and bankruptcies (current and historical)
  • Proprietors/director’s consumer credit information
  • Key macro-economic indicators

Based on the outcome of this analysis a decision is made to either progress the loan or not.  If the loan is progressed to Auction, a risk ranking is applied from 1 to 5 (5 is the highest ranking / lowest risk borrower). 
Approved borrowers are listed on the reverse auction site with upper and lower limits on the interest rate to ensure investors are appropriately compensated for the risk borrower poses even if demand from investors for the loan is high. 

RateSetter

This platform provides both consumer and business loans.  RateSetter completes a credit risk assessment to determine the borrower’s creditworthiness.  This process is broken into three phases; Application Assessment, Risk Assurance Charges and Credit Assessment.
The Application Assessment is the first pass credit assessment based information provided by the applicant and third party credit reports.  An applicant may not progress past this step based on the outcome of their risk profile.
If an applicant does progress, a Risk Assurance Charge is determined based on the borrowers expected risk of default.  Note on this platform investors are not paid a premium when lending to risker borrowers (nor do you know if you are lending to a risker borrower).  Instead borrowers pay a risk assurance charge that goes into a provision fund that is used to compensate investors in the event of borrower defaults.  The higher the risk of the borrower the more they are required to pay into the provision fund.
The last phase is the credit assessment, which takes a more detailed review and confirmation of the applicant’s details.  This may include, but not limited to:

  • Verification of the applicant’s identity
  • Confirming employment status
  • Verifying living expenses and other debt obligations
  • Assessing applicant’s income is sufficient to meet living expenses, existing and new loan obligations without causing hardship 
  • Confirming security for the loan (if applicable)

A similar process to the above is applied to business loans with a focus on the business financial health and ability to service the loan.
The final interest rate is set by investors and borrowers on RateSetter’s open market platform.  Market supply and demand influences the final rate investors and borrowers agree to. 

OurMoneyMarket

This platform provides consumer loans up to a 7 years in length.  Interest rates are determined by the Interest Rate Committee whose objective is to set competitive rates to borrowers whilst providing competitive risk-adjusted returns for investors.
The committee consider a number of factors including

  • General economic environment
  • Estimated default rates per loan grade
  • Loan terms
  • Competitive factors such as rates set by other marketplace lenders and banks

From there interest rate bands are assigned to the loan grades A+ to D with A+ loans determined as the highest rating (lowest risk) borrowers.
The credit history of individual borrowers determines the loan grade that is applied and based on their unique circumstances and credit history a personalised rate (with the band) will apply.  This fixed rate loan with the relevant details on risk is offered to investors for funding.

As you can see, platforms utilise different methods for setting interest rates based around a credit assessment of the borrower.  Although there is no direct reference to the RBA’s cash rate, there is reference to economic conditions which typically would include cash rate movements.  So while a rate cut does not automatically mean a reduction in returns to investors, there is the possibility that returns may reduce to match the new economic conditions. 

From my general observations, I have perceived reductions in returns on TruePillars and RateSetter although these happened prior to the RBA cuts and appear to be driven by demand from investors and not related to a drop in the cash rate.  In contrast OurMoneyMarket rates appear to have remained stable to date.  I believe this because the final interest rate paid by the borrower is not affected by the demand from investors as is fixed as part of the credit assessment.  Interested to hear other people’s thoughts and observations on interest rates and returns received from Peer to Peer platforms.

Our Money Market updated user experience

In this post I wanted to give an update on my user experiences with Our Money Market from when I first started using the platform back in...