|« Crowdfunding vs P2P lending||What defines P2P lending ? »|
Lies, damn lies and statistics
We have all seen the advertisements “8.8% gross yield”, “earn 8.6% AER", "average gross rate was 10.4%", "returns typically above 8%", "average interest... 10.49%". One of the reasons the P2P Money website came into existence was to provide a level comparison between each of the peer-to-peer companies.
The most important factor that will broadly define the overall return to lenders (after the headline interest rate) is bad debt. This is the money that is written off when a borrower can’t repay. With any lending there is the risk of bad debt. We can mitigate this by spreading money between borrowers, and it can be reduced with a provision fund, but we can’t prevent it. Borrowers are typically put into a risk category, with an estimate of the potential bad debt assigned to each category. This simply means that the population borrowers within that risk band (over an economic cycle) will – if the risk scoring has been done correctly – produce defaults to the estimated default rate.
Some peer-to-peer companies will be cautious with their estimates to give an additional buffer to lenders, but sometimes this doesn’t cover the bad debts at the bottom of an economic cycle. The P2P Money website will compare the performance of each of the peer-to-peer and peer-to-business companies against their own estimates, so current and future lenders can understand the risks involved. This data will then be used to define the actual return to lenders, using their latest interest rates, if the default rate was to remain the same. Each company will provide their data in a slightly different format, so it can make our job a bit harder, but the P2P Money website will crunch the numbers to provide an overall statistic that means the same for all companies.
Of all of the providers, Funding Circle has the best presented set of data. This is followed by YES-secure who split their data by year. RateSetter have the simplest data as there is only one risk category, and no further number crunching of that is required. Zopa produce a detailed spreadsheet with all of the risk categories and bad debt for each (but more recently have removed some of this data, which means it is not possible to perform the analysis easily on Zopa data and we hope they will reverse their decision). ThinCats send a monthly summary to the P2P Money website and Squirrl.com publishes data in a similar format to Funding Circle.
We have taken the decision to split YES-secure data into two separate entries following their rebranding and changes to underwriting; YES-secure (historical) and YES-secure Encash (current). This change has raised the historical YES-secure bad debt to 15.59%, just under twice their original estimates. The new Encash bad debt is currently zero, but as there has not been sufficient data (one year’s data is required by the P2P Money website), it is not possible to draw any conclusion from this.
Every month we will publish the latest data, so that lenders and compare and contrast the different providers, and see how well they are performing to thier own estimates.
Lender offers have got steadily lower to the point where they dropped to 3.3% over the weekend of 21st / 22nd July and then right on cue this morning, 23rd July, there were 11 borrower requests totalling well in excess of £50000 at 3.3%.
Don’t anyone try telling me that this isn’t manipulation which, I strongly suspect is instigated by “City Boys” or similar, borrowing at low rates in order to “short” the market.
Once again the smaller investor is being shafted by the spivs in the City of London therefore I suggest a campaign of withdrawing funds from RateSetter until rates return to a more sensible level, there are a number of places where you can achieve 3.2% if not 3.3% monthly.
I posted the same comment on the RateSetter forum to which I received an email response from RS and following my reply to this, received a phone call from RS this morning.
I’m not suggesting for one moment any malpractice on the part of RateSetter but my comments appear to have rattled some cages and the expression “no smoke without fire” comes to mind.
I’ll leave readers to draw their own conclusions.
The monthly market on RateSetter has been extremely popular with lenders and borrowers and I'm sure this is a big part of their overall business.