The other morning I came across this article about borrowers seeking loans from non-traditional sources, one such source being Peer-to-Peer lending. I had read about peer to peer lending previously and was familiar with the concept although had never gone much more into it than that. This article perked my interest, so I went and explored a New Zealand based peer-to-peer lending platform, Harmoney.
Harmoney works by connecting those who are looking to borrow money with those who are willing to lend it. It does a lot of middleman man work like credit ranking borrowers and rating them based on their risk profile.
Borrows apply online an fill out of their details as they would a traditional loan application, they have to verify their identity, income (through bank statements), and assets and liabilities. Harmoney then uses this to rank the borrowers A1 – F5 which designates what interest rate they will be charged, ranging from 6.99% for A1 to 29.99% for F5. Once a borrower has accepted a loan it goes live on the marketplace, where I as the lender can assess all the live loans and choose to invest.
The marketplace looks similar to below, I can see all the active loans that need funding, and can click on each loan to get more detailed information about the lender such as income, employment status, living situation and if the given one, the reason for the loan.
Harmoney uses a system of fractionalisation when funding loans meaning my money is split into $25 packets, I can then choose to invest a certain number of packets in each loan. This ensures that the risk is spread widely among lenders. So for example, if there was a loan for $1000, that would be split into 40 packets. meaning up to 40 different investors could cover that loan, or I could choose to invest 4 packets meaning I would fund 10% of the loan. This system offers a good way for small investors like me to quickly spread their risk.
So whats in it for Harmoney? On the investor side, they make by charging a lender fee which is tiered based on the value of your outstanding principal. So as an investor with less than $10,000 in outstanding principal Harmoney will take 20% of the gross interest I receive from loans being repaid.
On the borrower, side Harmoney charges a one off “Platform Fee” of $500, this is added onto the total loan amount – so if a borrower had a 10k loan then it would be placed on the market as $10,500 with them receiving 10k and Harmoney $500 upon successful funding. On top of this fee, they also charge a range of other fees for things such overdue payments. This decrease the more you lend.
So that’s the basics of how it all works. After spending the morning reading all the fine print and getting my head around how it worked I liked the sound of it. I despise payday lending and the predatory practices which many companies operate. These companies offer “easy cash” at a faint-worthy interest rate of 700% in some cases, simply taking advantage of those desperate and not particularly commercially savy. The contracts are much of the time complicated, lengthy, and very rarely in true layman’s terms. Harmoney seemed different, their maximum interest rate although high for most (29.99%), seemed fair for the riskiest of borrowers. It was also pointed out to me by Harmoney’s people that at 6.99% they offer the lowest personal loan rate in the country.
Overall I found they presented their fee structure and lending process in a reasonably transparent and easy to understand manner, at least in my opinion. I was on board, so I decided to dive in, albeit with a small splash, just $300.
Getting registered was reasonably pain-free and took about an hour, I just needed all the normal stuff, ID, IRD details etc. Once my account was activated which was the same day, it was a simple bank transfer and voilà I was all ready to lend. So how was I going to about this, I wanted to achieve a good rate of return whilst minimising my risk. If a loan gets written of you may well get none of your principal back. Harmoney does use to “debt sales” in an effort to recoup some of the lost principal which is then reimbursed to lenders, although this is not always successful. Keeping risk in mind I set my self some lending rules:
- The monthly repayments had to be no more than 15% of the borrower’s monthly income;
- No more than 30% of my portfolio could be in the E & F categories, and;
- The reason for the loan had to be sensible, debt consolidation or business cash flow are my top reasons, with buying a new car ranking somewhere near the bottom.
So I spent a few days finding a nice spread of loans that fit my rules I now have 12 loans that I have helped fund. So time to sit back and wait for the payments start trickling in at the end of January and then on a monthly basis after that, once I have received $25 back in principal and interest I will reinvest in another loan.
From the lender point of view your dashboard looks similar to below. It gives you a quick overview of your risk spread, the split between 36 & 60 month loans, and the outstanding principal you have. As I haven’t been active long enough my RAR isn’t yet displayed but if I get close to the platform RAR of 11% I’ll be pretty pleased.
Despite putting some money in I do have some concerns about Harmoney. Firstly, I question how motivated they are to truly ensure a borrow is a sensible choice. This is where that $500 establishment fee becomes important in my mind. If it’s paid upfront a huge motivation for Harmoney to ensure the creditworthiness of the lender disappears as they have received the majority of their money. I emailed Harmoney about this and received the below response:
This is not correct. Harmoney takes every effort to ensure every loan that enters the marketplace is creditworthy. As a responsible lender, we will not lend money to anyone we believe can not service the loan. And of course, under the new Lender fees, as well only receive fees if the borrower repays, we are aligned with the Lenders.
Where we do experience write offs (defaults), we work hard to avoid them with an in-house collections team who will work one-on-one with every delinquent borrower for up to 180 days to get them back on track. Our motivation is to provide the fairest and safest option to both Borrowers and Lenders. You can see our performance in terms of write off here: https://www.harmoney.co.nz/investors/marketplace-statistics. You can also learn more about how we earn revenue here: https://www.harmoney.co.nz/how-it-works/how-harmoney-earns-money
A pretty good response I thought. Definitely looking into it its seems over the last few years Harmoney has made some changes to align itself more with investor interests so hopefully, this trend continues.
Looking at loan to income ratios, some of the loans that I have seen in the marketplace have been for significant amounts, ie. over 40k, with the monthly repayments in some cases reaching above 40% of the borrower’s monthly income. Prima facie this seems pretty reckless to me, and are not loans that I would likely invest in.
Yet despite this, I thought it was worth a go, I’ll keep you up to date with how it turns out.
You can read all the fine details that I have skimmed over on Harmoney’s website, a good place to start is here.
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