Social lending: Investment amount per loan

Diversification is always easy in theory – invest into as many loans as possible per month and modify your investment amount based on that. This, however, assumes that you have a pretty good idea of how many loans you get into which is pretty difficult to predict, especially with the new bidding system in Bondora.

moneyperloanStarting out

When I started building my portfolio I was quite careful about how much money I wanted to put into the system. This means that I started investing mostly at 5€ per loan. This means that my exposure per loan was as small as possible while I was building up my portfolio, making sure that I wasn’t taking on unnecessary risk. Since I didn’t have a big amount of money to enter the market with at once, then I decided to slowly build my portfolio to reach 100+ loan pieces for a better diversified portfolio. This plan didn’t last long.

Investing such a small amount of money has two problems. Firstly, in a slow market (and there have been months where there weren’t that many investment opportunities) it means that you leave a lot of money sitting in your account waiting for investment opportunities. The second problem being the fact that if a loan becomes overdue then at a 5€ piece it takes forever to get any penalties – I’m quite sure the rounding system of the penalties is skewed towards bigger pieces as well. (This means I think a 10€ piece gets >x2 the penalties of a 5€ piece but I don’t have their calculating formulas to back this idea up.)

Minimal div. rate reached

Once I got more comfortable with the system a few months in, I bumped my investment amount to 10€ per loan for A1000 loans and gave out some lower quality loans at 5€ per piece. Since I added in a fair bit of money at this point then it didn’t take long to diversify my portfolio – by the end of summer of 2013 I was reaching 1000€ in investments, which meant that every investment was 1% of my whole portfolio.

I kept this up quite a while since the step to bigger amounts seemed quite steep – I could generally invest all my money by the end of the month, so I didn’t see a reason to jump to 25€. (Though you can get smaller steps with a script as well.) In theory I was running at a near perfect diversification method – divide up the amount of money you invest per month by the amount of loans you expect to get into – it came out to a convenient 10€ per loan for me.

Time to step it up

I started pondering the jump to 25€ pieces when the market started slowing down the start of this year. If my money hadn’t gone out by the end of the month, I modified my portfolio manager to invest in 25€ pieces. I started seeing the jump in money as well – a 25€ loan which became delayed paid pretty sweet penalties compared to the tiny 5€ pieces that I invested into at start.

I currently have 6 portfolio managers running and I have two of them which are allowed to make 25€ investments – A1000 & B1000 loans. It’s actually working out quite well, since more than 50% of my money goes into these two groups and I let the lesser credit groups get 10€ pieces. This means that I can mostly place all my money while keeping an optimal div. rate. I’m trying to push to increase the amount of money I put in every month and really, once you go over 250€ per month, then the 10€ pieces become silly to chase.

My portfolio has climbed to 2500€+ by now, so 25€ pieces still count for about 1% of my portfolio. I don’t see myself increasing the amount per loan to 50€ at any time soon – firstly, I think I should double my portfolio before that and really increase the amount of money I put in per month – 300€ in investments with a mix of 10€ and 25€ pieces is fine, but a 50€ piece is more than 15% of the amount of money I invest per month. I’ll probably have to reconsider this depending on how Bondora gets their underwriting process to work – I don’t just want to make a huge jump in the loan piece size, because with such a small portfolio it can have a fairly big impact. Overall though, I think my portfolio is going through quite nice organic growth.

5 thoughts on “Social lending: Investment amount per loan

  1. About penalties. Could be interesting to know what happens with all these 5-10 eur loans penalties. If it is rounding up, then where this fraction of your euro cent is going? As there are many of these small loans players i suppose then someone is collecting it and in future as bondora grows bigger (also amount of small loans) and if penalties are still popular then it could add to nice chunk of free money for someone.

    the thing with bondora is that they are changing rules of game whenever they want. I have some investments there (and it is very tempting to be fully tilted towards loans instead stocks. Heh, cognitive bias.

    Bondora for me many times looks like a black box. Which could be fine if I am making one time investment, but as I am trying to understand bondora and to look years ahead (unknown borrower screening process, its methodology; increase in future’s overdue/defaults; future’s interest rate reduction; illiquidity) this reduces my excitement to participate in it.
    Basically what i am trying to figure out for myself: ‘’Which returns will be more sustainable and superior in 20 years time window – Bondora’s or strategy’s in stock market?’’

    1. I am interested in the rounding process for penalties as well. I suspect, that the people who have the biggest loan pieces benefit from it (the 100, 250 and 500€ pieces) since it would be impossible to round them up very well between all the tiny pieces. I mean, if you have 100 small 10€ pieces, then you can’t just round up every 0.9 cents into a 1 cent penalty and with a 1.1 cent penalty you’re going to just round it down.

      I’ve currently decided to diversify between Bondora and stocks, but I am quite strongly biased towards loans right now – the returns are just that tempting. I do believe that Bondora will be around in the long term – especially since other P2P lending companies have already made a lot of mistakes to learn from and secondly because by this point Bondora is big enough that it won’t be allowed to fail easily. (I mean, it has approx 10% of the Estonian consumer loan market, it can’t just disappear.)

      Their level/quality of communication of course deserves a lot of criticism but I do think they’ve gotten a lot better in the past year. As they start to stabilize more I hope that the flow of information starts to be more preventative instead of apologizing after mistakes have been made.

      1. I was more thinking that bondora receive the rounding numbers. For example, if you have 0.9 of cents, you get nothing but bondora gets it; if you have 2.3 cents, then you receive 2 but bondora 0.3 and so on. I would find it surprisingly charitable from bondora’s side if it gives big investors more money just because of the rounding error.

        ‘’10% of the Estonian consumer loan market’’ – looking on statistics majority of borrowers are credit junkies and people to whom no one else wants to give a loan (and this is our target group in bondora for us as investors, as we are chasing 20-30% returns and using automated investing). What will happen with these junkies when music will stop (when they will not have option to roll-over their loans)?

        I sound depressing but its just because I try to talk myself out of bondora.
        Nevertheless I am really excited to see how bondora and P2P market will develop in the future. If bondora will still be up by 2034.06.01. (Merger counts if in time of a merger bondora has a good balance sheet) I will send you Riga’s Black Balsam bottle.

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