lending-moneyIt’s been just over twelve months since I started my Peer2Peer (P2P) lending experiment with New Zealand-based company, Harmoney, so I thought it would be a good opportunity to do a review of my experience and determine whether my expectations are being met.

I last gave you a progress report back in July when I was deciding whether or not I was going continue with Harmoney as they had changed their fee structure significantly and it appeared as though my user costs may triple. You can read more about that here, but in short, the previous structure meant that you paid 1.25% on interest and principal received. The new fees meant that I would be paying 15% on interest only. This calculated out to be a three-fold increase at first appearance.

The other factors that were weighing on my decision were that all loans are unsecured, and that you can only claw back your funds once a lender has repaid the principal which could be up to 5 years if they chose to go the full term.

In the end, I decided to leave my current investment as-is and keep an eye on whether a combination of defaulted loans (yes, some lenders don’t pay you back your money) and increased fees meant that I would be better off investing elsewhere.

Well, I’m please to say that my Realised Annual Return (RAR) rate doesn’t appear to have diminished at all and that it has remained steady above the 15% mark. This is well above the rate of my fellow lenders with an average return of 13.54% and far better than the average return received by Harmoney’s institutional lenders at 12.11%.

Here’s a current summary of my account.

Harmoney-account-summary

As you can see, the arrears are currently $107 and this amount doesn’t seem to change much. Most of the arrears are less than 30 days which, apparently, is quite normal as borrowers get their payment schedules sorted and many need a regular nudge from Harmoney to remember to make their monthly payments.

Defaults are tracking at 1.24% of loans or 1.1% of principal which, of course, is higher than I would like (basically these are borrowers who have decided, for what ever reason, not to repay their loan) but these figures are still within the expected average range. Not ideal but in the bigger picture, not a show-stopper.

I use to fund mostly the higher interest rate loans, namely C, D, E and F, but these are typically where most of the defaults have come from. No surprises there.

Now that Harmoney have introduced automated investing on their site, I am able to set up investment criteria filters and the platform will reinvest funds more in keeping with my risk profile. So now I’m a bit more fussy about who gets my money. With my filter set to A, B and C only with certain loans such as holidays, loans to family members, and other reasons that I don’t think are good investments excluded, I hope to see a drop in defaults while my returns remain steady.

I’m sticking with Harmoney for the longer term but won’t be investing any more funds into this platform for the near future. For the same reasons that I explained in my July article, there are just too many what-ifs with this style of investing to be completely comfortable for me.

What will happen when we hit the next economic downturn? Will I suddenly see the defaults skyrocket as budgets become tighter?

What if I wanted the funds for some other purpose? Until the borrower repays the loan, your money is effectively locked away throughout the loan term.

I still see P2P lending as a valid form of investment and the various platforms are always improving their services to make it easier for their customers to use. I used to have to log on several times a day to reinvest funds before the auto-invest feature came along. That’s a huge improvement which means there’s less chance of missing the type of notes I want to lend on, and I only need to check every few days that things are ticking along as they should be.

I will continue to reinvest all principal and interest received, back into other loans. If my 15-plus percent return is maintained long term, this will become a very lucrative source of income in a few years time.

Have you had any experience with Peer2Peer lending? If not, is it something you may consider? And if you have, has it met your expectations as a lender?

17 thoughts on “My Peer2Peer Lending Experience One Year On”

  1. Harmoney, despite its good returns has always left a bit of a bad taste in my mouth. I see people applying for loans on 39% rates and my heart just breaks. I’ve seen the loans to “lend money to a family member” and in no way is that the full story. I’m not sure if its really helping by lending such huge amounts of money to young people or are they so desperate that harmoney is the only place they can turn? So now my automated loans now only go to A,B,C borrowers and I put most of my p2p lending into squirrel. The returns are lower, but the loan shield and higher rated borrowers give me much more peace of mind. I am getting about 8.5% there, which is a lot better than a term deposit and you can onsell the notes.

    1. I came to a similar conclusion with the higher risk loans and that’s where all of my defaults have come from too, surprise, surprise. I’m also a lot more fussy about the type of loans I invest in now with my automated loans being A, B & C like yourself. I’m probably going to invest some more but in Lending Crowd as their loans are secured. Although the returns will be lower, the reduction in defaults should make up the difference. Thanks for dropping by and sharing your experience with P2P.

    1. I have noticed that many of the other platforms have lower returns than Harmoney, especially at the higher risk levels. I don’t think you would be able to invest in NZ Harmoney outside of NZ as you need a tax number and local address. I used to live there and still have some financial interests in NZ so I could set it up.

      Harmoney have started in Australia but at the moment only have institutional investors. I believe that they are planning to open up to retail investment at some time. Maybe send them an email asking whether they have a time frame for retail.

  2. Huh. I haven’t tried any Peer2Peer lending, mostly because we haven’t started our money-growing game (still getting out of debt!). I’m also risk-averse, so I’m not sure I trust people enough! But it does look like you’re getting some awesome returns, so that’s pretty juicy. I’m curious: what are your rights when someone defaults? Do you just lose all of that money? I’m trying to learn a bit more about our investment options before we start investing.

    1. Hi Mrs Picky and thanks for stopping by. Yes, P2P can be higher risk but you do have control over what notes (loans) you want to lend on whether your criteria be lower risk categories or purpose for the loan. So I choose lower to medium notes over high risk, high interest. If a borrower defaults, the P2P platform has a debt collection process the same as any other lending institution but if the borrower absconds with your cash, it’s gone. That’s why you split your funds over as wide a range of notes as possible to fractionalise the risk. Hence, my lost has been just over 1% but my return is around 15%. It’s a built in risk factor. However, it will always be a small investment for me as I do prefer lower risk options for the majority of my portfolio. I hope that answers your questions.

  3. Congratulations. It’s great to see that your returns are staying strong with all the recent changes.

    I’ve wanted to invest in peer-to-peer lending for a while now, but unfortunately I cannot as it is not legal where I live. There are probably creative ways that I can use to invest, but it hasn’t been worth my effort to figure that out yet.

    Looking forward to continuing to hear how it goes.

    1. Yes, Mrs Groovy mentioned that P2P is not legal in North Carolina where she lives. Seems strange to a foreigner like me that each state can decide what they allow and what they don’t. Is there a specific reason why P2P isn’t allowed where you are or is it just that the regulators haven’t got around to deciding what the rules are?

      1. I researched the issue a few months ago. It appears that at one point, P2P was legal here, but it was challenged. The state decided that P2P loans represented the sale of unlicensed securities and they refused to provide an exemption. This is not a very business friendly state.

  4. We would try Lending Club but it’s not legal in North Carolina. I like how you’re staying with lower risk loans, and keeping only a small amount invested. It’s not like a fund where you can evaluate the holdings, performance, fund manager, etc. and get out at any time. So it’s risky, but it can also be exciting. To me it’s like gambling, which should only be done if you can afford to lose. That’s how we view the money we invest in our lithium stock.

    1. Hi Mrs Groovy and thanks for dropping in. I hate to use the word’gambling’ as a gambler I definitely am not. It’s just gives you a lot of options depending on what your risk profile is. Mine is medium-low I suppose. I certainly don’t want to get into a situation where my defaults increase which is why I changed my investment strategy from “oh, there’s one”, to the more structured strategy of A, B & Cs while excluding some loan types. Hopefully that helps take the ‘gambler’ tag away. Why is P2P not legal in NC but is in other states?

  5. I hear you on the gambling. We’re so conservative that we feel like anything riskier than our usual index fund investing is a gamble.

    I think some states fear fraud with P2P lending. There are only a handful that won’t allow it.

  6. Thanks for this, Martin. It is definitely something I am interested in as a very small % of our portfolio (when we star investing). I will have to research what is available to Australians when the time comes.

  7. Luckily in California, we have most every form of P2P lending available to us. I’ve tried investing a small amount in the two biggest companies, Lending Club and Prosper, and am just trying to learn how it works. It’s been just about a year for me as well. My returns for both seem to be pretty similar and hover around 8-9%, not as nice as yours!

    1. It still amazes me that some US states allow P2P and others don’t, but as others have commented, that’s the way it is lol. Even 8 to 9% return is pretty healthy as long as the borrowers keep repaying their loans. Thanks for dropping by PI MD.

  8. Thanks for the update about how it’s going. It’s good to read that your returns seem to be holding up, even with the updates. P2P is interesting but I don’t think it’s for us. Maybe at some point down the track (in FI perhaps) but not now, and we’d only allocate a very small % of our net worth to it (1%-2% perhaps).

    Tristan

    1. It’s a fairly high risk investment, Tristan. Your funds are locked up until the borrower repays in full, and if there is a significant recession you may find borrowers get a little slack with their repayment program when money gets tight. I certainly won’t be betting the farm on P2P but I’ll hang in there as long as the returns continue to stack up. Thanks for following my progress.

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