Cut­ting out the bank as mid­dle­man

Maya Fisher-French in­ves­ti­gates a new lend­ing plat­form that aims to re­duce bor­row­ing costs

CityPress - - Business -

Peer-to-peer so­cial lend­ing is a grow­ing global phe­nom­e­non that links bor­row­ers and lenders di­rectly, by­pass­ing banks and their fees. It is a sim­i­lar con­cept to crowd­sourc­ing, ex­cept that in­stead of a busi­ness pro­posal, a bor­rower lists needs for a per­sonal loan and in­vestors de­cide if they want to com­mit funds based on a spe­cific re­turn rate.

While the model is aimed at low­er­ing bor­row­ing costs and pro­vid­ing bet­ter re­turns to in­vestors, it is not to be seen as a so­lu­tion for peo­ple with poor credit records to get easy credit.

Lau­rens Pohl, the coun­try head of Len­dico South Africa, an on­line peer-to-peer bank­ing ser­vice launched in South Africa ear­lier this year, says the com­pany ap­plies very strict credit cri­te­ria.

“We have a sim­i­lar un­der­writ­ing process to the banks, but have stricter cri­te­ria. If a bor­rower doesn’t pay and an in­vestor ex­pe­ri­ences a loss, they won’t re­turn, so it is very im­por­tant to us that we do not be­come a place for black­listed in­di­vid­u­als to get a loan. We are an al­ter­na­tive for cred­it­wor­thy peo­ple look­ing for lower in­ter­est rates or to con­sol­i­date their debt to de­crease their in­ter­est rate,” says Pohl.

Len­dico ap­plies a strict un­der­writ­ing process that in­cludes all credit data such as pay­ment pro­files and credit scores, as well as an al­go­rithm that analy­ses other data col­lected through so­cial me­dia, such as ca­reer pro­files and the amount of time a per­son stays in one job.

“If a bor­rower has de­faulted, their ap­pli­ca­tion is au­to­mat­i­cally re­jected. They have to have a clean record. We are not a pay­day lender or a reck­less lender,” says Pohl, adding that the chal­lenge is find­ing qual­ity loans be­cause around 90% of all ap­pli­ca­tions are can­celled due to poor credit records.

The other chal­lenge is find­ing in­vestors be­cause it takes time to build up trust. But ac­cord­ing to Pohl, thus far all the loans that have been ver­i­fied on the plat­form have been funded, al­though Len­dico does sup­port loans with its own cap­i­tal if it is short of in­vestors.

The av­er­age size of the in­vest­ment is cur­rently R5 000 and Pohl says they en­cour­age their in­vestors to di­ver­sify their port­fo­lio across sev­eral loans so if there is a de­fault, their en­tire cap­i­tal is not at risk.

In terms of de­fault­ing, Pohl says this mar­ket seg­ment has a de­fault rate of 4%, but by us­ing an al­go­rithm and stricter cri­te­ria, Len­dico hopes to re­duce this fig­ure.

So far, 35 loans have been pro­cessed since the launch in April this year and they have ex­pe­ri­enced no de­faults.

Should a de­fault oc­cur, Len­dico has a sys­tem in place to try to re­ha­bil­i­tate the loan and does not pe­nalise the bor­rower.

“We take care of the col­lec­tion for the first 90 days and try to get them back on track. If that fails, we sell the loan to a debt col­lec­tion firm and re­fund the in­vestor what we sold the loan for, which is usu­ally around 30% of the value of the loan,” says Pohl, who em­pha­sises that Len­dico does not make its money from fees earned on de­faults.

“Nor­mally, if you de­fault, the credit provider in­creases charges and earns fees on your late pay­ment. We don’t do that at Len­dico. We see this as a mu­tu­ally ben­e­fi­cial re­la­tion­ship and don’t add any penal­ties for late pay­ment.”

Re­search and ex­pe­ri­ence on peer-to-peer lend­ing has found that peo­ple are less likely to de­fault if they are bor­row­ing from in­di­vid­u­als than from a bank.

“It is sim­i­lar to the stokvel con­cept. It builds on trust and has sim­i­lar so­cial prin­ci­ples,” says Pohl.

How it works

A bor­rower’s re­quire­ments are posted on the site once they have met the lend­ing cri­te­ria. In­vestors can then “in­vest” in the loan and earn an in­ter­est rate based on the qual­ity of the loan.

Loans are cat­e­gorised ac­cord­ing to their risk pro­file and of­fer dif­fer­ent in­ter­est rates to in­vestors. Class A loans of­fer rates of 8% to in­vestors, while Class B loans of­fer 9%.

For ex­am­ple, one cus­tomer raised R32 500 for his brother’s ed­u­ca­tion. He qual­i­fied for a twoyear loan at an in­ter­est rate of 11.42%.

The in­vestors will earn 9% in­ter­est, net of costs, on the loan, and re­ceive both cap­i­tal and in­ter­est pay­ments each month over the two-year pe­riod. Pohl says most in­vestors choose to rein­vest this monthly pay­ment into other loans to di­ver­sify their in­vest­ment.

Bor­rower costs: You can ap­ply for a loan for free and only once the loan is ap­proved and fully funded will you pay any fees. There is an ini­ti­a­tion fee based on the Na­tional Credit Act of R150 plus 10% of the loan value up to a R1 000 limit. Un­like other ser­vice providers, there is no monthly ser­vice fee.

In­vestor costs: The in­vestor fee is equal to 1% to 3% of each monthly pay­ment, de­pend­ing on the loan. The in­ter­est rate earned is net of costs.

What do the num­bers say?

If you have a good credit his­tory, peer-to-peer lend­ing could pro­vide you with cheaper credit.

But as an in­vestor, you need to en­sure that the type of in­vest­ment meets your in­vest­ment needs and that you are fully aware of the risk.

If you have only in­vested in one loan and the per­son de­faults, you lose a por­tion of your cap­i­tal. You need to de­cide if you are be­ing ad­e­quately re­mu­ner­ated for this risk.

It is im­por­tant to un­der­stand the na­ture of the loan re­pay­ment and that you would not be re­ceiv­ing 9% per an­num on the to­tal value of the loan as the loan cap­i­tal is paid off monthly, there­fore, you can­not make a di­rect com­par­i­son to a nor­mal fixed de­posit.

For ex­am­ple

If you in­vested R5 000 into a Class B loan, with a higher-risk pro­file earn­ing 9%, you would re­ceive R228 per month for 24 months. By the end of the pe­riod, your to­tal cap­i­tal and in­ter­est pay­ments would be R5 472.

If you were to rein­vest your monthly re­turns, both cap­i­tal and in­ter­est, at the same 9%, you will re­ceive R5 982.10 at the end of the 24-month pe­riod.

If you in­vested R5 000 into a Capitec bank ac­count earn­ing 4.5% that paid out the in­ter­est each month, you would re­ceive R18 in­ter­est per month. If you left the money in­vested for two years, you would have re­ceived a to­tal of R432 in in­ter­est so cap­i­tal and in­ter­est would come to R5 432.

If you in­vested R5 000 into the RSA Re­tail Bond fixed for two years at 7.25% and rein­vested the in­ter­est, at the end of the pe­riod you would re­ceive a fi­nal pay­ment of R5 777.

This money is un­der­writ­ten by gov­ern­ment so it is prob­a­bly the least risky in­vest­ment avail­able.

Th­ese fig­ures show that in or­der to ben­e­fit from the 9% rate, one would have to con­tin­u­ously rein­vest the monthly pay­ment into new loans.

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