Being the Lender – What I learned from GoPeer
By Ryan Goldsman, CFP®, PAIP®
More than one year ago I received an email from a friend about a new platform called GoPeer, a peer-to-peer lending service that allowed Canadians to invest their capital (and become the lender), as well as allowing individuals to borrow. Essentially, a layer of democracy was added to lending which Canadians have not experienced in the past.
Fast forward one year, and the results have been quite good. On a net basis, I’ve received a return of 10% in spite of experiencing a number of defaults and/or write-offs.
For those not familiar with the platform, the company undertakes the due diligence process and provides the lenders with a base amount of information to determine if they want to lend to the borrower. In turn, the borrower has their application listed alongside other unfunded loans, which after a 30-day period or less, become an amortizing loan. Failing the full funding of the loan, it can be reposted for another 30 days, or accepted at less than 100% funded.
Having put in no more than $1,000 to begin, the biggest learning experience was how to evaluate each loan offered to investors. With a minimum investment of $10, I currently have close to 100 loans outstanding with an average return of 10%. Although most returns are greater than that, those who do not make the scheduled repayments unfortunately drag down the net rate of return.
But defaults are not all bad news. Having re-evaluated those which did not perform as expected, there is a clear correlation between certain factors and those which do not make their repayments.
According to my own observations, there is a clear correlation between one’s credit score and default rate, but that’s why higher risk borrowers are charged a higher rate of interest. Although lower grade borrowers account for the majority of loans which were not repaid according to plan, it’s not the only indicator.
Others which did not allow me to reach a clear conclusion include one’s profession, province of residence, and salary. The correlation between these factors (and default) is simply not strong enough to write about!
The factor that was the most important to determine which loans to avoid was one’s debt to income ratio. Out of the loans that defaulted (or made multiple late payments), there seemed to be one indicator that seemed to be present more than any other was an elevated loan to income ratio.
The bottom line: if someone has a history of managing their financial affairs poorly, then it’s probably a good idea to avoid the risk. As the old saying goes, if you’re in a hole, stop digging!