Are loans a good in­vest­ment?

Maya Fisher-French looks at the pros and cons of peer-to-peer lend­ing

CityPress - - Business And Tenders -

Last month, we wrote about the grow­ing global phe­nom­e­non of peer-to-peer so­cial lend­ing, which links bor­row­ers and lenders di­rectly, by­pass­ing banks and their fees. RainFin, which was the first peer-to-peer on­line lend­ing plat­form in South Africa, an­nounced re­cently that af­ter be­ing in the mar­ket for two years, it is list­ing about 18 new loans at a to­tal loan value of R400 000 for in­vestors to bid on every day.

This im­pres­sive growth caught the at­ten­tion of in­ter­na­tional heavy­weight Bar­clays Africa, which ac­quired 49% of RainFin’s busi­ness in March 2014 and is now an ac­tive lender in the mar­ket.

Peer-to-peer lend­ing is a sim­i­lar con­cept to crowd­sourc­ing, but 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. In the US, peer-to-peer mar­kets will fa­cil­i­tate roughly $5 bil­lion (R78 bil­lion) this year, but at less than 40% of the op­er­at­ing costs per loan granted com­pared with tra­di­tional banks, ac­cord­ing to Sean Emery, CEO of RainFin.

It is not, how­ever, a so­lu­tion for bor­row­ers with poor credit records. Although RainFin has a reg­is­trant rate of 350 cus­tomers per day, rep­re­sent­ing an av­er­age R7 500 000 in loan value, less than 10% of these ap­pli­ca­tions pass screen­ing af­ter un­der­go­ing a de­tailed moder­a­tion, scor­ing and af­ford­abil­ity assess­ment. Is it an at­trac­tive of­fer­ing for in­vestors? Peer-to-peer lend­ing mod­els are cer­tainly a cost­ef­fec­tive way for bor­row­ers with good credit records to ac­cess fi­nance, but are they pay­ing suf­fi­ciently high enough re­turns for in­di­vid­u­als to take the risk in in­vest­ing in these loans?

RainFin says it cre­ated the busi­ness to al­low in­vestors to re­ceive re­turns com­par­a­tive or bet­ter than RSA Re­tail Sav­ings Bonds. Emery said that given its ex­cel­lent man­age­ment of im­pair­ments (non­pay­ing loans), the worst-case sce­nario for in­vestors with sig­nif­i­cant im­pair­ment would bring their re­turns back to lev­els com­pared to that of re­tail bonds.

An in­vestor needs to keep in mind that when in­vest­ing in a bank ac­count or an RSA Re­tail Sav­ings Bond, the risks are sig­nif­i­cantly lower as you are not ex­posed to just one bor­rower who may de­fault. Peer-topeer lend­ing in­creases that risk.

Emery coun­ters that peer-to-peer lend­ing in it­self is not a high-risk cat­e­gory, although the in­di­vid­ual loans or as­sets within peer-to-peer deals could be high risk.

RainFin grades the var­i­ous loan ap­pli­ca­tions ac­cord­ing to a risk pro­file, and in­vestors can de­cide what level of risk and re­turn they wish to take. The higher the risk of the loan de­fault­ing, the higher the po­ten­tial re­turn to the in­vestor – so the risk is highly de­pen­dent on the in­vestor and the choices they make on the plat­form.

As an in­vestor, you need to un­der­stand the risk im­pli­ca­tions of opt­ing for higher re­turns. For ex­am­ple, an in­vestor in a grade A risk pro­file, with a po­ten­tial de­fault rate of 0.41%, would re­ceive a re­turn of 10% over the pe­riod of the loan, while an in­vestor in a higher-risk grade C loan, with a de­fault rate of 6.6%, would re­ceive a 20% re­turn over the pe­riod of the loan.

It is im­por­tant to un­der­stand the na­ture of the loan re­pay­ment, which is monthly – there­fore, an in­vestor re­ceives a monthly in­come, which in­cludes a por­tion of the cap­i­tal in­vested as well as in­ter­est earned. As the in­ter­est is charged on a re­duc­ing bal­ance, one can­not make a di­rect com­par­i­son with a nor­mal fixed de­posit – the ac­tual in­ter­est rate re­ceived is not a yearly rate. The in­vestor will re­ceive a de­tailed re­pay­ment sched­ule to en­able him/her to make in­formed de­ci­sions when in­vest­ing in a spe­cific loan.

For ex­am­ple, if you in­vested R10 000 in a grade A loan with a 10% re­turn over two years, you would re­ceive R461 a month, or R11 110.40 to­tal re­turn of cap­i­tal and in­ter­est – that is a re­turn of 11% over two years.

These are not par­tic­u­larly high re­turns and one would need to take in­creased risk to re­ceive re­turns above what the mar­ket cur­rently of­fers.

There is, how­ever, the as­pect of so­cial shar­ing – re­search and ex­pe­ri­ence have shown that peo­ple pre­fer to bor­row and lend to their com­mu­nity di­rectly rather than us­ing a bank, which is of­ten seen as an un­favourable “mid­dle man” that lim­its ac­cess to funds and charges ex­ces­sive fees.

For in­vestors who have an ap­petite for risk and can af­ford to ex­pe­ri­ence some loss or re­duc­tion in re­turn, the higher-risk loans could be an in­ter­est­ing op­tion. This is also an op­tion for an in­vestor who would like a sim­i­lar re­turn to a fixed de­posit, but prefers the con­cept of so­cial shar­ing and sup­port­ing the growth of peer-to-peer lend­ing as an al­ter­na­tive to banks.

WHO CAN BOR­ROW?

Must be a South African citizen Must be at least 18 years old Min­i­mum Del­phi score of 600 from Ex­pe­rian (credit bureau) Debt-to-in­come ra­tio of 60%, in­clud­ing mort­gage At least two cur­rent open credit ac­counts re­port­ing con­sumer be­hav­iour Five or less ac­count en­quiries in the past three months Min­i­mum credit his­tory of 24 months

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