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From the Ablrate Blog

Is buying or selling at a premium a bad thing in peer lending? 20/09/2017

Secondary market buying and selling p2p loans...

Buying p2p loans at a Premium or a Discount – is it right or wrong?

Unlike plenty of other platforms, Ablrate offers you the opportunity to buy and sell p2p loans at a discount or a premium on our secondary market. However, some people feel that this complicates matters or isn’t in the spirit of peer-lending. I think that it is important to address these issues.

There are two real risks to paying over 100p in the pound for a loan :

1. Value at Risk

The first thing to consider is “How much am I risking?”. Clearly if you pay over 100p in the pound for the capital remaining you are risking the higher amount as a potential capital loss, BUT as with any investment, you should never be investing in something where you feel that the risk of a capital loss is substantial anyway. If you don’t like a p2p loan on any site, then it is better to steer clear completely.

2. Early Repayment Risk

Most p2p loans carry the risk that the borrower repays the loan early. If this happens then there is a risk that you will not recover as much money as you paid for the loan. Take for example a loan that pays 1% per month in interest and 100p at maturity. If you pay 103p for it, then you need it to pay you interest for three months to break even. If it repays before that, you will have lost money. Here at Ablrate, we do not give borrowers an automatic right to repay early and we have minimum interest paying periods. However you can’t stop early repayments without imposing harsh early redemption penalties and while that may look attractive, it would reduce the borrower pool.

We do our best to avoid a situation where a loss could be ‘bought’. We do this by having minimum terms of loans (where early redemption would mean paying the interest to cover the minimum term).

We can also restrict the range at which a p2p loan is traded. For example, if a loan has a short amount of time until maturity or we have been informed of an early repayment, then we can change the range at which the loan is traded, including making it ‘par’ only (no premium allowed).

However, given that both of those points are legitimate ones for you to consider before making an investment decision, we then turn to the other less tangible points that people sometimes raise.

– Buying at a premium means that the seller gets “a quick profit” out of me

That’s not a rational way to think. Lending should be something where you don’t compete with other people… it should be all about achieving the best results for your portfolio. If there is a great p2p loan for sale at a great AER then you should buy it without thinking about the impact of that decision on someone else (taking into account all the risks of course).

– Buying p2p loans at a premium means that I am not getting the right interest rate for my investment

There is no “right interest rate” for an investment. It is up to you as a lender to look at all of the available options and make a choice. If, for example you see two very similar p2p loans with great companies and both offering an interest rate of 9% you might decide to spread your investment between both. If one of those originally was at 14% you shouldn’t be put off by that – when the company first borrowed it may not have been in as strong a position as it is in now. What you should always think of though is “What is my minimum return needed to balance the risk?”. If a yield is below that then stick to your principles and don’t get lured in.

On Ablrate we very clearly display the AER on all bids and offers to make it easy to compare p2p loans against each other.

Liquidity of p2p loans on the secondary market

Liquidity of p2p loans on Ablrate’s secondary market is based solely on the community being interested in buying and selling those p2p loans. Ablrate itself does not provide any liquidity. As at September 2017 the market was trading over £700,000 per month.

Liquidity of p2p loans on the marketplace is driven by a number of factors:

Price: If you are looking to sell a loan very quickly then a discounted p2p loan would give the incoming buyer a higher yield. The discounted offer you make in the secondary market would also appear first (if it is the deepest discount) in the list of offers as we always list the best offers and the best bids first.

Yield: A 14% loan of a similar risk profile will sell faster than a 10% loan for obvious reasons.

Current economic sentiment:  Any market, be it a bond market, stock market or a p2p loans market will suffer reduced interest in buying if the general outlook is gloomy. As we saw in the recent financial crisis, markets sold off a lot. Some, of course, see this as opportunity, it always makes sense to look at the underlying p2p loans you have an assess the risks in the current conditions.

If you need any assistance with your trading on our secondary market for p2p loans you can learn more here and we are always happy to talk you through how to trade our market. We will be posting some videos soon which will give you some insight and if you are new to p2p loans you can get our online lending guide here.

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Comments: 2

  1. BJ | March 15, 2018

    Very interesting blog and one that im surprised has not created debate . So I will start some comments.

    I’m new to Ablrate, after doing more research that an arm chair investor should not be doing as I am locked into a Company we all know has just gone into Admin.. so I hunted round and Ablrate gets VERY good Press coverage.- well done team. I joined .

    Low and behold NO pipeline of products…. shame, But then going to the secondary market .. a nice pipeline which is similar to other Large companies
    Very different methodology to a lot of others, so have read every web page going and on the FAQ pages and tried and errors and stumbled into it after a couple of days on and off etc….. we started our investment on the secondary market

    In summary my investments cost me nearly 2% extra ( or Loss depending on your position) to get on-board … so if they said 13% interest on the front cover- I got them for ave. 11% after bartering on the system. My due diligence was spending time reading the very good docs and updates on the system – well done team

    I find one I like, which is the same as other people and then you see 103%……, do I wait, do I invest, do I join the stock market trade. You can see why there no front end pipeline – people just pile in when a 13% comes on board. You lose No interest loading it onto the secondary market and then Just wait till new cash needs to be Invested ( me). The strategy seems to be frontend loading on the new product and then trade away on the secondary market and get extra profit and manage your liquidity on the as and when needed – basically the stock market trade.

    Should I now put some investments onto the secondary market and join the trading as Im not losing interest but could gain some back and increase my liquidity. This is just different I suppose , Im on the negative side at present as it just cost me to get into the market and can see a route to stock churn rather than investing. Apart from that – A VERY good Platform, very well supported, Great document posting, Good updates and Very good all round Info…..

    The fact you raise GOOD points on an INTERNAL open blog and comments section etc – you have to be highly commended for being open and doing this.

    1. AblrateAdmin | March 15, 2018

      Thank you BJ for your time in commenting. We have recently launched the Portfolio Loan feature that has a pipeline of around £10 million as well as a number of excellent loans that are coming up. We are also working on a new platform for our introducers which should streamline the on-boarding process of loans. Of course, if you don’t like the prices that loans are being offered you can always input a bid, if you do that at ‘par’ (100%) it would likely get filled. We are always balancing the placing power of lenders with the origination of loans as we want to maintain the quality of the loans and the returns for our lenders.

      Also, if you do pay a premium and stay in that loan until the end of the term, that initial premium would be spread over the term, so if there are two years remaining it’s actually reduced your return by less than 2% (if we are using the rate). Also in many cases, especially on amortizing loans, the security may have improved so buying at a premium and receving a lower rate is offset by a reduction in risk.

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