Investing into high interest Bondora loans

Since people want to take out high interest loans, then of course someone has to offer them. Bondora’s new rating system means that HR credit rating clients will have their interest rates at anything from 50-90%, due to the increased risk levels associated with the group.

As some of you may know, I have a small running experiment, where I occasionally take in super high interest loans to track how they’re doing and whether the theoretically higher interest level (which will theoretically pay out 3x principal payment) actually compensates for the losses.

By now the first loans given out under the new system are old enough to start seeing some defaults, so a quick look into how my high interest loans (>50%) have actually done. As you can guess it’s not a pretty picture.

highinterestloans

I have a bit more then 20 high interest loans, less than ten of those are old enough to start drawing any sorts of conclusions from them. The first nine are 5-8 months old, which is a point where many defaults have already happened (a lot of loans default right at the start).

As you can see, out of the 9 loans old enough to look at, 4 have defaulted, 3 are delayed (one will default in a matter of days) and only two are actually paying, but out of those two one has had the payments rescheduled. Not a particularly rosy picture.

However, by this point the 9 loans have already paid enough interest and penalties to balance out one of the defaults in case no recovery ever happened, so you can clearly see the ridiculous interest at work here. Provided the two green loans “hold our” for a while more and keep paying, the investment will be well on track to zero-sum before recovery, which might not seem to be the case when you look at how depressing the overall picture is.

Overall, I’d say that the results so far are as expected, a high default rate is unavoidable with such high interest rates and HR risk group, so I wouldn’t recommend testing this out of you’re trying for a conservative portfolio. For those chasing higher turns in the long run and hoping for recovery, it might work out quite well in the end. This is the part of my portfolio that I track for fun, so it only makes up ~2% of my overall portfolio value.

Are people who take out 90% loans stupid?

While the title may seem a bit harsh, this is the reality of what many people think – if you take out a high interest loan then there are very few reasons to do so, the top one being that the person taking out the loan is just plain stupid. Is that the case though, or is that always the case? If so, why are 90% loans even legal?

Maximum interest rates by law

Estonia is currently in the process of regulating maximum interest rates for loans. As it stands, the maximum is to be set at 3x average consumer credit rate, which makes the cap out to be at just about 90% interest. For any investor, 90% returns would be in the realm of magic, which is why such an interest rate for loans raises a lot of questions, why would anyone take out a loan with such an interest rate?

Loan eligibility

The answer to the question of why anyone would take out such a loan is easy – they aren’t eligible for any other loans. It seems some people (often investors) forget, that the majority of the population isn’t as well off as they are. Whether or not you’re credit worthy depends on many different aspects, and once you fail too many criteria it’s easy to see the interest rates climbing.

Having a low paying (or minimum wage) job, living outside of the capital, having multiple children, not having enough education etc. are all warning signs for creditors that increase your risk levels exponentially. While most people who have their finances in order can easily enjoy the chance to take out 9-12% consumer credit loans when necessary they are definitely a minority in the population.

This is one of the reasons why I’m in favour of capping interests, but against outlawing things like SMS loans for example. In Estonia, SMS loan has more than 100 000 customers! They are clearly offering a service that people need (and I agree that it’s super sad how many people need the service!). However, if we ban the service, what will people do? Steal? Get illegal loans from someone? While we can and should educate people, just cutting people off from money when they need it is not a good plan in the long run.

How bad are 90% loans?

Many people (rightly so!) believe that 90% loans are super expensive in terms of interest paid in the long run. The problem being, most people don’t really assess their loans in terms of the ratio of interest vs principal but they look at the monthly total payment. If they can afford the monthly payment then everything is OK, despite the fact that the interest rate might be insane.

90percentinterest

I made a chart that shows monthly payback sums for a 1000€ loan with various interest rates for 1 year and 3 years. While you can see the totals climbing at an alarming rate, you don’t see the steep growth for monthly payments – every 10% of extra interest only increases the payment by about 5-6 euros. That’s not enough to make people really consider not taking out the loans.

How to fix this?

As boring as the solution is, then more financial education is the way here. How effective that would be, is however, questionable. The high interest loans are theoretically OK as long as people are capable of making the payments.

The problems arise when people miss payments, and the interest and penalties start stacking up at an alarming rate, causing the situation where the interest owed is multiples of the original principal payment. That’s when we have a problem that has caused tens of thousands of Estonians to default on loans and the law has failed to protect them from their “stupidity”.

However, it’s not just stupidity that’s making people take out high interest loans – it’s lack of financial awareness, its difficult financial situations and a lack of emergency funds and living from pay-day to pay-day, all of those not as easy to change as we’d wish them to be.

MoneyZen portfolio, 12 months

By the end of August I will have been investing into Moneyzen for a full year, so it was time to make a decision about the future plans for this part of my portfolio, especially since it’s currently competing against Estateguru in terms of contributions.

moneyzen

 

Changing strategies?

Moneyzen has, from the start, been struggling with growing their overall loan portfolio at a sustainable rate. Investors have a lot of free money to invest, but they just didn’t seem to be getting the market share that they wanted due to existing competition in Estonia.

Several of the people I know have been waiting for some sort of a fix for this, and I must say we waited for some kind of an announcement to come way earlier. So, this week Moneyzen announced that they are making their loans more easily accessible which is a recommendation that’s been on the front lines of many bloggers’ posts.

They have extended the deadline of loans from 5 years to 7 years making them stand out among other loan provides, and the maximum loan amount has been boosted from 5000 euros to 10000 euros, bringing them up to par with the same amounts that Bondora provides. It’s early to tell if that will make them take more of a market share, but the extended length of loan contracts might attract a different kind of clientele.

Status of my portfolio

When I started investing into Moneyzen my original plan was to add in 50€/month to create a smaller social lending portfolio with a different provider than Bondora, since Bondora was making up a significant part of my portfolio at that point. Soon, however, I realised that the 50€/month was not achievable due to a lack of loans.

Another issue with Moneyzen is that the IT developments haven’t caught up with their ambitions, meaning that the site causes a liquidity problem. You can’t have enough loans to causes meaningful cash flow (which you’d be able to transfer out if necessary) and there is no secondary market. The biggest problem by far though is the lack of overall statistics – a year into investing I’m still not able to tell you at a glance how much money I made in interest last month.

moneyzen12m

Therefore the decision for at least the second part of this year had to be made. This morning I transferred the last 25€ into Moneyzen for now, bringing the total transfers to 400€ euros, which means 2/3 of my original year’s goal, which I suppose isn’t terrible. (Neither is the close to 40€ interest earned off it.)

I’ll wait for more to happen, mostly:

– less cash drag

– an implemented secondary market

– a bigger market share

– better overall statistics

– recovery statistics (I have 2 defaulted loans)

All the best to Moneyzen, and I hope I have a reason to increase my investments for next year. For 2015 I’m done, I’ll just track how well the money moves, and I guess it can be a somewhat obscure emergency fund type thing that I might have access to at some point in the future.

My Bondora portfolio (2015, July)

Summer keeps ticking on, and sadly I can already see shops selling notebooks and pens, which is the first sign that holidays will soon be over. My Bondora portfolio is being just about as sunny as the current weather, but there is some growth, even though I’m not adding in much money currently.

Checkpoints

julyinvestments

A bit before the end of the month, my Bondora portfolio actually climbed over 6000€ in terms of outstanding principal and the total lifetime interest earned also managed to make the leap to over 1500€. Starting to make predictions for the end of the year, it looks like a realistic goal might be 8000€ for portfolio value and 2000€ something total (1300€ for 2015) in terms of interest earned, which isn’t bad overall and might put me onto the path of earning 2K in interest next year, which is something that I wouldn’t’ve been able to imagine last year :)

Interest earned

julyinterestearned

My interest earned graph keeps kinda bouncing back and forth, but the month once again ended up just a bit above one hundred euros (101,67€ to be precise). My original plan for the year was so push monthly interest earned up to 150€ per month, but since I’ve cut down in investments then seems like an optimistic goal might be 120€, depending on how I manage. Free money is going into paying back apartment related loans, and my salary for autumn is still unsure, so changes might happen.

Recovery

julyrecovery

As always, recovery seems to be going slowly, but this month actually added a 4th loan that’s been fully recovered. I manually looked over a part of my portfolio, especially the loans that are more than 6 months old and I’d say about 70% of the defaulted loans are paying something. They’re of course quite slow in terms of paying back, but they are on the path to breaking even at least, which is already a good result for recovery. Loans going bankrupt however, isn’t slowing down speed, so even the IRR that Bondora is showing me has started to drop since I’m not adding in so much money any more.