Discussion
Wonga’s situation highlights just how much revenue stems from the client default model. A bit like the ‘nothing to pay for 6 months’ lending deals that work on a pretty robust formula of knowing in advance what percentage of clients will fail to make the initial payments at the end of the period and have to begin paying the hugely profitable default fees etc. Even the credit card firms can predict how much profit they can make from delinquencies and have in the past run models to work out how much credit to keep offering a client to get them to the point of firstly carrying over balances and eventually defaulting.
The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
Edited by DonkeyApple on Tuesday 28th August 00:37
Edible Roadkill said:
On a similar note I see wonga loans is also in trouble. Administrators have been appointed etc.
Maybe the end is coming for this sort of borrowing.
A good thing really!?
For most customers I’d say so, but there’ll probably be a subset who go back to the leg breakers instead.Maybe the end is coming for this sort of borrowing.
A good thing really!?
sidicks said:
EddieSteadyGo said:
Grim reading
Indeed, but as DA said above, there were plenty of people warning that these things weren't as good as they looked to be, and were often shouted down by those who had achieved good returns in the past.I feel slightly more educated now in terms of understanding risk, and therefore why we were getting 12%!
DonkeyApple said:
Wonga’s situation highlights just how much revenue stems from the client default model. A bit like the ‘nothing to pay for 6 months’ lending deals that work on a pretty robust formula of knowing in advance what percentage of clients will fail to make the initial payments at the end of the period and have to begin paying the hugely profitable default fees etc. Even the credit card firms can predict how much profit they can make from delinquencies and have in the past run models to work out how much credit to keep offering a client to get them to the point of firstly carrying over balances and eventually defaulting.
The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
Well said. The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
Edited by DonkeyApple on Tuesday 28th August 00:37
What pulled alot of us in (as investors) was the "security" of the asset backed sites. No one thought that perhaps the appraisals / LTV were going to be fudged.
trowelhead said:
Well said.
What pulled alot of us in (as investors) was the "security" of the asset backed sites. No one thought that perhaps the appraisals / LTV were going to be fudged.
Thevquestion that was always raised was “if this is low risk borrowing and there is strong collateral, why can the borrowers not access debt capital through conventional means”. In most cases the answer was clear!What pulled alot of us in (as investors) was the "security" of the asset backed sites. No one thought that perhaps the appraisals / LTV were going to be fudged.
James_B said:
For most customers I’d say so, but there’ll probably be a subset who go back to the leg breakers instead.
That’s the depressing aspect. On the one hand opening up lending facilities to the most vulnerable is a very good thing and there will be many people who have benefitted from the regulatory changes of the late 90s that allowed this but on the other is the knowledge that there was always a reason why lenders didn’t lend at this level and the hideous social ills and impoverishment that such lend is guaranteed to bring to the many others. The real solution is to remove this type of lending from the private sector and to run it through the State with full recognition that if so many people are needing to borrow from day to day to pay essential bills that there is something fundamentally wrong at such a core level that the cause needs to be directly addressed rather than the cheap, nasty and socially destructive quick fudge of debt being used to fob the masses off.
It needs to be recognised that if someone genuinely needs short term loans to fill wage shortfalls that such a person cannot be charged the levels of interest and penalties that a private enterprise seeking to be profitable needs to charge as their very need for this type of money states categorically that they cannot afford the cost of obtaining it.
We’ve had 20 years of private sector debt being used by the Government to synthesise wage inflation and absolve them from the responsibility of State of ensuring sufficient employment opportunities in the right locations and that these opportunities pay enough, while we more fortunate individuals have a tendency to write such people off as feckless. They are feckless and that is why weaponising them with quick fix debt is always disasterous for everyone and the true solution is to ensure sufficient work at a sufficient wage while also letting those who refuse to then work go without.
DonkeyApple said:
James_B said:
For most customers I’d say so, but there’ll probably be a subset who go back to the leg breakers instead.
That’s the depressing aspect. On the one hand opening up lending facilities to the most vulnerable is a very good thing and there will be many people who have benefitted from the regulatory changes of the late 90s that allowed this but on the other is the knowledge that there was always a reason why lenders didn’t lend at this level and the hideous social ills and impoverishment that such lend is guaranteed to bring to the many others. The real solution is to remove this type of lending from the private sector and to run it through the State with full recognition that if so many people are needing to borrow from day to day to pay essential bills that there is something fundamentally wrong at such a core level that the cause needs to be directly addressed rather than the cheap, nasty and socially destructive quick fudge of debt being used to fob the masses off.
It needs to be recognised that if someone genuinely needs short term loans to fill wage shortfalls that such a person cannot be charged the levels of interest and penalties that a private enterprise seeking to be profitable needs to charge as their very need for this type of money states categorically that they cannot afford the cost of obtaining it.
We’ve had 20 years of private sector debt being used by the Government to synthesise wage inflation and absolve them from the responsibility of State of ensuring sufficient employment opportunities in the right locations and that these opportunities pay enough, while we more fortunate individuals have a tendency to write such people off as feckless. They are feckless and that is why weaponising them with quick fix debt is always disasterous for everyone and the true solution is to ensure sufficient work at a sufficient wage while also letting those who refuse to then work go without.
I used to invest in P2P through Zopa, ratesetter etc and if you drilled into your portfolio it would often give reasons for the people's borrowing requirement (after the loan had been issued annoyingly!) and the majority of the reasons in my portfolio were holidays, new car, school fees (!) etc. This may be different on platforms dealing with higher risk borrowers or I'd have tweaked settings to loan at a higher risk I'm not sure. However, my observation was that it was non-essential borrowing, on the basis of their reason being true of course.
DonkeyApple said:
Wonga’s situation highlights just how much revenue stems from the client default model. A bit like the ‘nothing to pay for 6 months’ lending deals that work on a pretty robust formula of knowing in advance what percentage of clients will fail to make the initial payments at the end of the period and have to begin paying the hugely profitable default fees etc. Even the credit card firms can predict how much profit they can make from delinquencies and have in the past run models to work out how much credit to keep offering a client to get them to the point of firstly carrying over balances and eventually defaulting.
The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
You have summed it up perfectly - and the mini bond market is about to go bang very loudly, very soon.The professional lenders at this level of the market, where conventional lenders have decided that the person is not a good bet to lend to, are the pawnbrokers. Ask a pawnbroker if they would lend to their clients without being given collateral up front that already covers all potential costs and risks and they will just think you’re mad.
The P2P model’s primary issue is that it has to charge its borrowers less than a professional lender would in order to attract the business. A professional lender would look at the risk and work out what rate should be charged for that risk but then also then look at whether that rate is low enough to allow the borrower to achieve their goals. Often not so lending is not available. The P2P has to offer below that rate and so builds up a book that is all priced wrong and all high risk. And there is no diversification. No mortgage book etc to offer balance. The P2P model also can not afford to carry out true checks on its borrowing customers, its a much simplified electronic form exercise in many instances. Easily gamed. Nor can the P2P operator afford to really chase defaults but opts to run a more simplified model of just adding costs to an amount the borrower has already made clear they aren’t planning on paying back.
From the lender's perspective, in the cold light of day, it’s sheer lunacy. You’re lending, at 100% capital risk to individuals that have effectively been rejected by professional lenders via a system that carries out only superficial checks and has little ability or desire to enforce. You have zero relationship with who you’re lending to and no recourse. And you’re doing all for just a few percent over base. You’re putting 100% of your capital at risk to unknown, uncontrollable borrowers for a few percent over base! Absolute madness.
The biggest trick of the P2P industry is managing to get people to think that it is lending and therefore getting people to accept lending rates.
The reality is that no one in their right mind would give £1000 to a random punter of dubious credit worthiness with few real checks or safeguards and all in exchange for a £40 return over 12 months. At least Wonga price their lend appropriately.
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
Whilst I can get that some people are naive enough to not understand that they are taking 100% of the risk in return for a single digit annual return, I cannot understand for the life of me how the government/regulator allows these investments within a pension and created a dedicated ISA for P2P lending.
DonkeyApple said:
Wonga’s situation highlights just how much revenue stems from the client default model.
Historically, yes. But not anymore. Wonga would be just fine under the current FCA Rules which prohibit the Client Default Model you refer to but are in trouble due to having to repay irresponsible lending pre-2014. There has been a massive increase in Claims Management Company activity in the Payday sector of late and this alone is the reason Wonga - and others - are in trouble in the UK Market. All loans - every single one - are sent to the FCA on a quarterly basis by every Payday Lender in the UK as part of each High Risk Loan Lender's reporting activity. They are very much in control of this sector. Customers cannot roll over loans more than twice. The interest rate is capped at 0.8% per day and so are default fees - there is a limit to how much a defaulting customer has to repay in total and it is no more than twice the original loan. Wonga et al also cannot repeatedly raid Customer bank accounts, they are limited in that respect too. They also have to actively promote FCA- advised realistic repayment plans - bearing in mind the limit to how much Lenders can add interest for - as well as Debt Relief Charities and other debt aid.
A lot has changed and the FCA are very strict Regulators.
As it happens, the FCA are imminently about to clamp down hard on P2P and Claims Management Companies too - I get all the updates from them and I've seen their 'proposals' which will be law soon. They dealt with Payday first, they are reasonably happy with the result and now they are going after the rest.
JulianPH said:
DonkeyApple said:
I suspect the delightful mini bond market is going to start to unravel over the coming years as well.
the mini bond market is about to go bang very loudly, very soon.Coolbanana said:
Historically, yes. But not anymore. Wonga would be just fine under the current FCA Rules which prohibit the Client Default Model you refer to but are in trouble due to having to repay irresponsible lending pre-2014. There has been a massive increase in Claims Management Company activity in the Payday sector of late and this alone is the reason Wonga - and others - are in trouble in the UK Market.
All loans - every single one - are sent to the FCA on a quarterly basis by every Payday Lender in the UK as part of each High Risk Loan Lender's reporting activity. They are very much in control of this sector. Customers cannot roll over loans more than twice. The interest rate is capped at 0.8% per day and so are default fees - there is a limit to how much a defaulting customer has to repay in total and it is no more than twice the original loan. Wonga et al also cannot repeatedly raid Customer bank accounts, they are limited in that respect too. They also have to actively promote FCA- advised realistic repayment plans - bearing in mind the limit to how much Lenders can add interest for - as well as Debt Relief Charities and other debt aid.
A lot has changed and the FCA are very strict Regulators.
As it happens, the FCA are imminently about to clamp down hard on P2P and Claims Management Companies too - I get all the updates from them and I've seen their 'proposals' which will be law soon. They dealt with Payday first, they are reasonably happy with the result and now they are going after the rest.
Good to hear. I knew there had been changes after the FCA were asked by the Govt what they had been doing for the last decade and the FCA didn’t have the balls to say that they had been asleep and doing nothing other than waiting for the odd email from Europe with some changes to follow. Fear of claims management companies has probably been the only vague regulation for many retail industries during the big sleep. All loans - every single one - are sent to the FCA on a quarterly basis by every Payday Lender in the UK as part of each High Risk Loan Lender's reporting activity. They are very much in control of this sector. Customers cannot roll over loans more than twice. The interest rate is capped at 0.8% per day and so are default fees - there is a limit to how much a defaulting customer has to repay in total and it is no more than twice the original loan. Wonga et al also cannot repeatedly raid Customer bank accounts, they are limited in that respect too. They also have to actively promote FCA- advised realistic repayment plans - bearing in mind the limit to how much Lenders can add interest for - as well as Debt Relief Charities and other debt aid.
A lot has changed and the FCA are very strict Regulators.
As it happens, the FCA are imminently about to clamp down hard on P2P and Claims Management Companies too - I get all the updates from them and I've seen their 'proposals' which will be law soon. They dealt with Payday first, they are reasonably happy with the result and now they are going after the rest.
JulianPH said:
You have summed it up perfectly - and the mini bond market is about to go bang very loudly, very soon.
Whilst I can get that some people are naive enough to not understand that they are taking 100% of the risk in return for a single digit annual return, I cannot understand for the life of me how the government/regulator allows these investments within a pension and created a dedicated ISA for P2P lending.
I had no idea that P2P was permitted within those wrappers! I thought minibonds had been blocked from SIPPs?Whilst I can get that some people are naive enough to not understand that they are taking 100% of the risk in return for a single digit annual return, I cannot understand for the life of me how the government/regulator allows these investments within a pension and created a dedicated ISA for P2P lending.
I had a lunch over the summer with an old partner who had raised over £25m in client funds to start buying up various minibonds at discount and taking the assets where viable. I can’t really recall the details as the lunch started about two hours before any food appeared.
Just to update this - to add insult to injury, and on top of the loan default/recovery book now looking like it will grow bigger than the entire live loan book by year end, it appears that Lendy has passed on lenders details to several borrowers who are attempting to sue individual lenders directly for the way that Lendy have conducted themselves. So it appears it is indeed possible to loose more than just the capital you invested.
Things appear to be going from bad to worse.
cashmax said:
Just to update this - to add insult to injury, and on top of the loan default/recovery book now looking like it will grow bigger than the entire live loan book by year end, it appears that Lendy has passed on lenders details to several borrowers who are attempting to sue individual lenders directly for the way that Lendy have conducted themselves. So it appears it is indeed possible to loose more than just the capital you invested.
Things appear to be going from bad to worse.
How is that even logical, yet alone legal? Is this really happening? It seems almost impossible. Things appear to be going from bad to worse.
DonkeyApple said:
cashmax said:
Just to update this - to add insult to injury, and on top of the loan default/recovery book now looking like it will grow bigger than the entire live loan book by year end, it appears that Lendy has passed on lenders details to several borrowers who are attempting to sue individual lenders directly for the way that Lendy have conducted themselves. So it appears it is indeed possible to loose more than just the capital you invested.
Things appear to be going from bad to worse.
How is that even logical, yet alone legal? Is this really happening? It seems almost impossible. Things appear to be going from bad to worse.
http://p2pindependentforum.com/thread/8000/dfl017-...
Lots of lessons learned for amateur investors here TBH, just why anyone would get involved with a loan like this is completely beyond me, but just goes to show how toxic some of this stuff really is. Got a feeling Lendy will be the first high profile scalp that exposes this business.
You need to have a look at the t&cs and get a copy of the loan agreement/s.
Most of these lenders will provide a list of investors to the borrower, so that’s not unusual, however if this is not in t&cs then they have possibly breached data protection laws.
The loan agreement should also state the solicitors used in the transaction if they are the same be concerned.
If a lender has lent funds without relevant quoted security in place they will be liable.
If a solicitor has made a mistake their PI will take a hammering, likewise with the valuer.
If your going to make investments like this ensure you are well spread say .5% of what you’ve got in each project. So 50p for every £100 in P 2 P, but TBH, they have no balance sheet to absorb losses/adjustments/fluctuations or even natural disasters, so it’s all your cash at risk.
Most of these lenders will provide a list of investors to the borrower, so that’s not unusual, however if this is not in t&cs then they have possibly breached data protection laws.
The loan agreement should also state the solicitors used in the transaction if they are the same be concerned.
If a lender has lent funds without relevant quoted security in place they will be liable.
If a solicitor has made a mistake their PI will take a hammering, likewise with the valuer.
If your going to make investments like this ensure you are well spread say .5% of what you’ve got in each project. So 50p for every £100 in P 2 P, but TBH, they have no balance sheet to absorb losses/adjustments/fluctuations or even natural disasters, so it’s all your cash at risk.
cashmax said:
http://p2pindependentforum.com/thread/8000/dfl017-...
Lots of lessons learned for amateur investors here TBH, just why anyone would get involved with a loan like this is completely beyond me, but just goes to show how toxic some of this stuff really is. Got a feeling Lendy will be the first high profile scalp that exposes this business.
Having just read all 35 pages, I feel like someones turned on the lights at the cinema before the end of the movie just as it was getting interesting!Lots of lessons learned for amateur investors here TBH, just why anyone would get involved with a loan like this is completely beyond me, but just goes to show how toxic some of this stuff really is. Got a feeling Lendy will be the first high profile scalp that exposes this business.
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