P2P default forecasts are rising, but should investors worry?
DEFAULT forecasts across some of the main consumer peer-to-peer lending platforms have begun ticking up.
At the same time lenders have faced pressure to keep borrower rates lower to compete with cheaper loan pricing among banks and building societies.
So should investors be concerned about rising default expectations?
Zopa figures show its expected default rate is now higher than at the start of the financial crisis in 2007, at 4.52 per cent for loans granted in 2017 against 2.74 a decade previously, but other platforms have similarly high forecasts.
Lending Works predicted default rates of 3.4 per cent for loans made in 2017, which is more than double the rate when it first started lending in 2014, and up from 3.2 per cent in 2016.
RateSetter (which originates consumer loans as well as business and property loans) indicated that its expected default rate is 3.18 per cent for 2018, the same as last year. This is down from 3.43 per cent in 2016 but its default rate was 1.4 per cent when it first started lending in 2011. It increased to 1.54 per cent in 2013 and 2.43 per cent in 2014 before hitting 3.02 per cent in 2015.
It should be noted that both Lending Works and RateSetter have safety nets to protect investors from losses. Zopa is winding down its provision fund, so new lending has not had this coverage since December.
Furthermore, the actual losses on all three platforms for loans originated over the past few years have turned out to be lower than expected so far.
Zopa’s actual default rate for 2017 is currently 0.86 per cent, Lending Works is at 0.6 per cent and RateSetter at 0.73 per cent.
It was a similar story in 2016, when Zopa predicted 4.14 per cent of loans originated in that year would default, but just 3.19 per cent have so far. Lending Works actual default rate for 2016 is 2.8 per cent, compared with expectations of 3.2 per cent, while RateSetter’s figure for 2016 loans is currently at 2.75 per cent, compared with forecasts of 3.43 per cent for the year.
Read more: GLI chief fears “car crash” of P2P defaults
Neil Faulkner, managing director of P2P analysis firm 4th Way, says default rates will inevitably increase as loan books get larger.
“When P2P lending platforms are very small, they can be more selective of their borrowers than they need to be, accepting just the cream of the cream,” he told Peer2Peer Finance News.
“As the platforms grow, it becomes impossible to focus on those super-prime borrowers only, so they have to start accepting ‘regular’ prime borrowers.
“The more borrowers they want to accept, the looser their standards ultimately have to be, which is why investors need to keep an eye on platforms’ standards.
“Currently, due to the poor economy, we’re going through something of a bad patch in terms of more borrowers struggling to repay their debts. This is surely impacting the default rates in P2P lending, just as it will have affected banks.”
Faulkner said investors can mitigate the risks of default by diversifying across different platforms.