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.

First user experiences of Funding

  Funding (https://www.funding.com.au/) is the fifth Peer to Peer platform I’ve now signed up for and am actively investing through.  Fundi...