[P2P] Statistical Review of Funding Societies After 100 Completed Loans
By The Boy Who Procrastinates - May 11, 2019
Ever since the launch of Singapore's first P2P campaign in 2014, the concept of P2P financing has taken its roots over the years, contributing to a rising trend of fintech startups vying for a slice of the pie in the crowdfunding space.
In this article, I will be sharing my experience and statistics after completing 100 loans with one of the P2P platform operators — Funding Societies ("FS").
What is P2P Lending Platform?
To put it simply, P2P lending platforms, acting as intermediaries, facilitate financing between borrowers and lenders.
Lenders, in this scenario, refer to retail investors like you and me. For investors, P2P lending can present itself as an alternative asset class on their portfolios with low minimum investment requirement and potentially high returns.
Borrowers, on the other hand, are mainly small and medium-sized enterprises ("SME") seeking funds for business needs. Compared to traditional banking system, the P2P lending platforms offer quicker loan approval and funding process, allowing business to capitalise on short-term business opportunities. Furthermore, some of these SME may not have the collateral or credit standing necessary for the eligibility of a bank loan.
Lenders, in this scenario, refer to retail investors like you and me. For investors, P2P lending can present itself as an alternative asset class on their portfolios with low minimum investment requirement and potentially high returns.
Borrowers, on the other hand, are mainly small and medium-sized enterprises ("SME") seeking funds for business needs. Compared to traditional banking system, the P2P lending platforms offer quicker loan approval and funding process, allowing business to capitalise on short-term business opportunities. Furthermore, some of these SME may not have the collateral or credit standing necessary for the eligibility of a bank loan.
Currently, there are more than 10 such platforms on the market. Under the Securities and Futures Act, platforms that raise funds from the public through P2P lending are required to hold Capital Market Services licenses by the MAS.
Type of Loans
At this stage, FS offers 4 different types of loan to borrowers for various needs:
- Business Term Loan: Unsecured loan products that are mainly requested by SME to expand their businesses, as well as for the purpose of project financing. Tenure can range between 1 to 12 months.
- Invoice Financing: A form of short-term borrowing where SME sell their accounts receivable or invoices to improve their working capital. Unlike term loans which are unsecured, the invoice acts as collateral for invoice financing. Shorter loan tenure, generally range between 1 to 4 months.
- Property-backed Secured Loan: Loans taken by SME which have pledged local properties as collaterals. Longer loan tenure mostly at 12 months.
- Revolving Credit Facility ("RCF"): Allows borrowers to take multiple loans as long as it is within the tenure period and up to a pre-approved limit. RCF tenure can be up to 12 months.
In the risk reward paradigm, invested money can provide higher profits only if the investor is willing to accept a higher possibility of losses. Therefore, it follows that the expectation of returns should commensurate with the level of perceived risk by an investor.
For example, the property-backed secured loan generally offers a lower interest rate as these loans are backed by assets which reduce the associated risk.
The 100 completed loans were split almost evenly into term loan and invoice financing with the balance tilt slightly in favour of latter at 57%.
Invoice financing is generally considered to be less risky for investors as compared to term loan. This is because borrowers have delivered the goods/services to their customers and are expected to be receiving payments. The unpaid invoices in this scenario, are being used as collateral for financing.
Parenthetically, I have observed that majority of the investment opportunities exist in the form of either term loan or invoice financing, with only a handful of property-backed secured loans being available once in a while. I have not come across RCF at this stage as it is a relatively new product.
With the availability of data, we may try our hands in examining the relationship between 2 variables — Loan Duration and Returns. This may help to provide insight into how the length of the loan duration may affect the amount of interest earned.
Delving into the above scatter plot, we may observe that there is a greater degree of statistical dispersion in terms of returns for loans with shorter duration as compared to its counterparts. However, investing in loans with longer tenure does not appear to be reaping significantly greater returns.
Computing the weighted average return for each duration variable produces the following table:
Discounting the weighted average return for loans with tenure of 1 month, the longer-term loans tend to be yielding slightly higher returns than loans with tenure of 1.5 to 3 months. The sweet spot seems to be directing towards loans with duration of either 1 or 4 months.
Examining the boxplot diagram, we can see that the length of the boxplot and whiskers for Invoice Financing appears to be slightly longer than that for Term Loan. This indicates that there is greater variance in the returns for Invoice Financing.
Invoice Financing has a slightly lower median as compared to Term Loan, implying that 50% of the returns are greater than 9.7% for Invoicing Financing whereas 50% of the returns are greater than 10.2% for Term Loan.
In terms of mean (marked by the cross), Invoice Financing has a higher average returns at 12.38% than that of Term Loan at 11.20%.
One may deduce that investing in Invoice Financing may yield less consistent returns but it comes with higher average returns, albeit not a significant difference. Overall, there does not appear to be discernible difference between the 2 types of loan investment in terms of returns.
However, statistics should probably be taken with a pinch of salt. Personally, I do not think that 100 is a large enough sample size to paint an accurate picture. Moreover, there are a slew of factors that may affect the returns such as different creditworthiness of borrowers, late interest incurred and my preference towards shorter term loans.
Say if we take the benchmark of the 2018 median gross monthly income of Singaporeans and PR at $4,437 (inclusive of employers' CPF contribution) as reported by MOM, that will put us at the tax bracket of 7%.
With the tax rate of 7%, the weighted average after-tax returns from P2P investment will be reduced from 9.81% to 9.12%.
For example, the property-backed secured loan generally offers a lower interest rate as these loans are backed by assets which reduce the associated risk.
Conducting Due Diligence
As with any other investment, performing the necessary due diligence is of paramount importance before committing your money to it. This is especially so given that P2P lending is widely considered to be a risky investment product largely due to the inherent credit risk associated.
Even though FS does not consistently disclose the identity of the borrower, a loan factsheet will invariably be provided before the commencement of the funding process. The document contains the necessary details of the loan, such as the repayment schedule, summary of the borrower and its financial condition. These details allow investors to understand the borrowers' financial health and to carry out informed investment decision for each loan accordingly.
As a creature of habit, I have recorded the pertinent details for each loan periodically. This helps to provide an overview of my progress thus far and allows me to tally the amount of fund available in the FS account.
Started dabbling in P2P lending in Nov 2017, I have observed some interesting statistics with the accumulation of data since and would like to share it for the benefits of other investors.
As a creature of habit, I have recorded the pertinent details for each loan periodically. This helps to provide an overview of my progress thus far and allows me to tally the amount of fund available in the FS account.
Started dabbling in P2P lending in Nov 2017, I have observed some interesting statistics with the accumulation of data since and would like to share it for the benefits of other investors.
Type of Loans Invested
The 100 completed loans were split almost evenly into term loan and invoice financing with the balance tilt slightly in favour of latter at 57%.
Invoice financing is generally considered to be less risky for investors as compared to term loan. This is because borrowers have delivered the goods/services to their customers and are expected to be receiving payments. The unpaid invoices in this scenario, are being used as collateral for financing.
Parenthetically, I have observed that majority of the investment opportunities exist in the form of either term loan or invoice financing, with only a handful of property-backed secured loans being available once in a while. I have not come across RCF at this stage as it is a relatively new product.
Amount Invested
One of the merits offered by P2P lending platforms is the low barrier to entry for investors to crowdfund loans. For certain loans, FS allows a minimum investment quantum of $20 which provides investors better diversification of their P2P portfolios.
As illustrated, the amount that I have invested in a single loan ranges from $20 to $4,000. Majority of the investment were taken up in amounts of $50, $100, $500 and $1,000, which were commonly observed as maximum investment limits for most loans.
The aggregate sum invested in these 100 loans is computed to be $40,860, far exceeding the initial fund that I have set aside. This is because the repayment received with each completed loan can be re-invested in another new loan.
(Click to enlarge)
The aggregate sum invested in these 100 loans is computed to be $40,860, far exceeding the initial fund that I have set aside. This is because the repayment received with each completed loan can be re-invested in another new loan.
Loan Duration
(Click to enlarge)
The tenures of the loans offered typically range between 1 to 12 months. However, most of the loans that I have chosen to invest in are skewed towards relatively short-term ones, as shown in the above graph.
19% and 35% of the completed loans have tenures of 30 days and 45 days respectively. At the other end of the spectrum, only 5% of the completed loans have tenures of 12 months.
The rationale of the strategy employed is to recover the principal and interest early, so as to increase my participation rate in more upcoming loans. But of course there is no ideal approach as each individual has different preference and game plan.
19% and 35% of the completed loans have tenures of 30 days and 45 days respectively. At the other end of the spectrum, only 5% of the completed loans have tenures of 12 months.
The rationale of the strategy employed is to recover the principal and interest early, so as to increase my participation rate in more upcoming loans. But of course there is no ideal approach as each individual has different preference and game plan.
Service Fees
There is no free lunch in this world. As an online platform that matches curated borrowers with investors, FS charges a nominal service fee of 18% of interest earned. The fee structure adopted by FS, distributes the service fee across each loan repayment. That is to say, service fees are only deducted when there is repayment of interest to the investors.
(Click to enlarge)
From the graph, one may observe a conspicuous step-up in the service fees incurred. This is chiefly due to the increment of service fee from 15% to 18% of interest earned with effect from Feb 2018. FS has explained that the fee hike is due to the inclusion of the prevailing GST imposed by IRAS.
Another eye-catching piece of the graph is probably the outlier of 0% service fee in Nov 2017. The fee for that particular loan was waived to incentivise investors to participate in the crowdfunding for a big loan.
The general trend of the service fees see-saws slightly but remains close to 15% or 18% of interest earned.
The general trend of the service fees see-saws slightly but remains close to 15% or 18% of interest earned.
Returns
Many investors may be incentivised to participate in P2P lending due to its potentially high returns. If we were to take into consideration of the service fees incurred, will the yield still be as attractive as publicised? Let's find out.
Graphically, one of the striking features is probably the numerous spike in returns for some loans. Based on the data collected, my understanding is that the late and early interest received by investors are not subjected to service fees, hence boosting the returns that an investor may receive.
If we were to readjust the chart frame and pay no attention to the aforementioned outliers, the returns from the loans generally fluctuates between the 5% to 10% markers.
For sake of clarity, the rate of returns is simply calculated using the following equation:
To get a typical value from the set of data, the simple average of the returns is determined to be 11.87%.
However, this may not be an accurate measure since the invested amount for each loan varies. As an alternative, we may consider assigning weights (ie. invested amount) to the return values and compute the weighted average.
For the 100 completed loans, the weighted average of the returns is calculated to be 9.81%. Subsequent to the increment of service fee in Feb 2018, the weighted average of the returns has been reduced to 9.14%.
(Click to enlarge)
If we were to readjust the chart frame and pay no attention to the aforementioned outliers, the returns from the loans generally fluctuates between the 5% to 10% markers.
For sake of clarity, the rate of returns is simply calculated using the following equation:
To get a typical value from the set of data, the simple average of the returns is determined to be 11.87%.
However, this may not be an accurate measure since the invested amount for each loan varies. As an alternative, we may consider assigning weights (ie. invested amount) to the return values and compute the weighted average.
For the 100 completed loans, the weighted average of the returns is calculated to be 9.81%. Subsequent to the increment of service fee in Feb 2018, the weighted average of the returns has been reduced to 9.14%.
Relationship between Loan Duration and Returns
(Click to enlarge)
Delving into the above scatter plot, we may observe that there is a greater degree of statistical dispersion in terms of returns for loans with shorter duration as compared to its counterparts. However, investing in loans with longer tenure does not appear to be reaping significantly greater returns.
Computing the weighted average return for each duration variable produces the following table:
(Click to enlarge)
Relationship between Type of Loan Investment and Returns
Another interesting variable to plot a graph with is probably the type of loan investment. Will there be a notable difference in returns if we were to invest in invoice financing or term loan?
(Click to enlarge)
Examining the boxplot diagram, we can see that the length of the boxplot and whiskers for Invoice Financing appears to be slightly longer than that for Term Loan. This indicates that there is greater variance in the returns for Invoice Financing.
Invoice Financing has a slightly lower median as compared to Term Loan, implying that 50% of the returns are greater than 9.7% for Invoicing Financing whereas 50% of the returns are greater than 10.2% for Term Loan.
In terms of mean (marked by the cross), Invoice Financing has a higher average returns at 12.38% than that of Term Loan at 11.20%.
One may deduce that investing in Invoice Financing may yield less consistent returns but it comes with higher average returns, albeit not a significant difference. Overall, there does not appear to be discernible difference between the 2 types of loan investment in terms of returns.
However, statistics should probably be taken with a pinch of salt. Personally, I do not think that 100 is a large enough sample size to paint an accurate picture. Moreover, there are a slew of factors that may affect the returns such as different creditworthiness of borrowers, late interest incurred and my preference towards shorter term loans.
Rate of Default
In the context of P2P lending, defaulting occurs when a borrower has failed to repay on a loan. However, I understand that there are varying definitions of default rates amongst P2P lending platforms and the regulatory body.
For example, MAS states that a loan is defaulted if it is 30 days past due or in default, whichever is earlier.
FS, on the other hand, defines default by product types:
For example, MAS states that a loan is defaulted if it is 30 days past due or in default, whichever is earlier.
FS, on the other hand, defines default by product types:
- Invoice Financing: 60 days past due
- Business Term Loan: 90 days past due
Personally, I am not perturbed by late repayments, just as long as the principal and interest are repaid by borrowers eventually. For the sake of my own data collection, I would regard a defaulted loan as one that is not repaid completely, either in terms of principal or interest.
In this sample of 100 completed loans, I have encountered one default case (1%). Fortunately, the borrower has defaulted on late interest payment only and the recovery of the principal was unaffected. Regardless, I have marked it as a defaulted loan due to the incomplete repayment.
In this sample of 100 completed loans, I have encountered one default case (1%). Fortunately, the borrower has defaulted on late interest payment only and the recovery of the principal was unaffected. Regardless, I have marked it as a defaulted loan due to the incomplete repayment.
Paying tax on P2P interest
It is widely known that dividends derived from stocks/bonds investment are not taxed at personal level in Singapore. However, this is not the case for interest earned from P2P lending.
According to IRAS, the interest income collected from loans to companies, are subjected to progressive tax rates for resident taxpayers, determined by the income bracket in a given year.
To put it simply, the net interest that an individual can earn from P2P lending has to be deducted from the following items:
- Service Fee of 18%
- Tax rate (varies with personal income bracket)
With the tax rate of 7%, the weighted average after-tax returns from P2P investment will be reduced from 9.81% to 9.12%.
Closing Thought
Frankly, I would consider a net return of 9.12% per annum to be hardly adequate to compensate for the inherent high risk nature of P2P lending.
While investors may put in effort in conducting the due diligence and understand the financial health of borrowers before committing their funds to it, there are numerous associated factors that may cast a shroud of uncertainty over the P2P lending industry.
In any case, it is likely that I may cease my investment in the domain of P2P lending after the investment in loans with longer tenures have come to fruition.
I will probably write on this again when I have gathered more data with each completed loans.
While investors may put in effort in conducting the due diligence and understand the financial health of borrowers before committing their funds to it, there are numerous associated factors that may cast a shroud of uncertainty over the P2P lending industry.
Furthermore, unlike investment in stocks and bonds, I do not fancy the idea of tax payable from interest income eating into the returns from P2P lending.
In any case, it is likely that I may cease my investment in the domain of P2P lending after the investment in loans with longer tenures have come to fruition.
I will probably write on this again when I have gathered more data with each completed loans.
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Disclaimer: Kindly note that this is not a sponsored post. The author is in no way affiliated with the stated crowdfunding platform (other than being an investor) and does not receive any form of remuneration for this post. The Boy who Procrastinates has compiled the information for his own reference, with the hope that it will benefit others as well.
