Asked by Anonymous
Asked on 20 Apr 2019
I am developing an interest in P2P platforms but having some difficulties in understanding the default rates.. Could someone kindly explain to me and the workings behind it? Additionally any other tips or details you could share with an amateur like me that needs to take note of?
This is Cass and I’m the community engagement manager from CoAssets :)
Firstly, to answer your question, a default rate is the percentage of outstanding loans that has yet to be repaid after 30 days (according to MAS). This has been covered by some of the other post in this thread and the one my Kenneth Fong is quite comprehensive so I shall not repeat those points 😅😅😅
In terms of other tips and details, a new investor like yourself should first take a look and see how those default rates stack up.
Based on what’s published online, the default rates for the various platforms for 2018 are shown below:
Apart from default rates,some other information that you may want to look into before participating are:
Some questions you could ask yourself:
I hope this answers your question :)
The definitions from Investopedia are great, but I'm sensing that you need more information, context, and preferably in simple-r English.
First things first.
What Is P2P Or Peer-To-Peer Lending?
P2P lending platforms connect businesses or individuals looking to borrow, with people looking to invest.
Borrowers can take advantage of lower rates, usually determined based on their credit scores or business plans. Obviously, the better your credit score or the more sound your business plan is, the lower the rates of interest you would have to pay on your loan because you're appraised as more likely to be able to pay back the loan.
Meanwhile, investors (or 'lenders' if you will) with extra funds gain access to an attractive fixed income asset class that potentially yields better returns than other investment options like leaving it in the bank.
What Are Default Rates?
With the context being P2P lending, to 'default' on a loan is when a borrower fails to repay a loan.
As a borrower, you want to keep the default rate on your profile as low as possible so that more potential investors are likely to invest in you.
As an investor, you want to look for P2P platforms and borrowers with overall low default rates (read: lower chance of you losing your capital). But this is tricky... More on this in a bit.
Simply put, default rates are an important statistical measure used by lenders to determine their exposure to risk and whether they would want to invest in your business or lend you money.
All Of This Sounds Damn Iffy... Is The Government Regulating This?
Why of course. It's Singapore leh
From 23 Feb 2019, all licensed securities-based crowdfunding (SCF) operators (for eg. Minterest, Funding Societies and etc) should "disclose information on interest rates and non-performing loan rates (read: default rates) in a consistent manner to enable investors to effectively compare different SCF offers and better understand the potential returns on their investments" (info from MAS Circular No. CMI 27/2018).
This means that they have to state their overall default rates CLEARLY on their websites so that investors like yourself can make an informed decision.
For your reference, this is the MAS way of defining what is a default (info from MAS Circular No. CMI 27/2018):
What it means is that a defaulted loan is one which is 30 days past due OR in default based on contractual terms - whichever is earlier.
So you see? Investopedia's definition DOESN'T apply to this context. Our government is damn kiasu, so 270 days to them is...
However, the displayed default rates on thse SCF operators' sites are not that straightforward either.
While all the SCF operators have to display the MAS defined default rates, they sometimes have their own ways of calculating their overall default rates.
Default Rates In The Real World Of P2P Lending
Let's look at Funding Societies for example.
If you go to their website and click on 'Statistics', then go to 'Loan' and click on 'Default Rate'. You'll see this:
So you go, "Oh... Funding Societies' loan default rates have been dropping steadily since 2016 to 2019. Which means that the risk involved as an investor should be lower now, and it stands at 0.83%"
Wait, that's NOT the full picture.
If you scroll down and click on 'Performance of Singapore', you'll get tables which display the MAS way of calculating default rate:
You're probably going, "Walao, this one more cheem. Why can't I just look at the 0.83% default rate of Q2 2019 in the earlier table and be done with it?"
The fact is, even I don't know how Funding Societies calculated the "0.83% default rate". It's not explained anywhere.
I'm guessing the 0.83% is correct to Q2 2019, so in a way, it's even more updated than the figures in the table above which are probably correct as of 31 Dec 2018. We probably have to get in touch with their friendly customer support to better understand how did they get that figure though...
But if we look at the MAS mandated figures, we can see that non-performing loan rates that are past 30 days (but fewer than 90 days) jumped from 0% in 2017 to 0.47% in 2018. Whereas loans past 90 days dropped from 0.08% in 2017 to 0% in 2018.
Also, the way which Funding Societies define 'default' is slightly different:
Now, let's look at Minterest. They do not have an overall default rate. But if you looked at the 'Statistics' tab on their site, you'll see:
However, unlike Funding Societies, Minterest doesn't give you the overall default rate of Q2 2019. The above information is only accurate as of 31 December 2018.
So you still need to look at the opportunities available (after you sign up for an account as an investor, of course) for investment and determine if it's worth investing in or not.
In summary: You really need to know what is the default rate you're working with before dabbling in P2P lending. Always ask questions when in doubt!
There are many more aspects to P2P lending than just the default rate. If you'd like to read more, Seedly has a pretty good introduction article to P2P lending: https://blog.seedly.sg/p2p-comparison/
As per Investopedia:
The default rate is the percentage of all outstanding loans that a lender has written off after a prolonged period of missed payments. A loan is typically declared in default if payment is 270 days late.
The default rate is the percentage of all outstanding loans that a lender has written off after a prolonged period of missed payments. So if 1 out of 100 lender defaulted on the loan on the P2P platform, the default rate will be 1%.
Can you share more about your product? Is it just p2p cash lending or some sort of invoice financing?
Simplistic term : percentage of your outstanding loans have been lost and is highly unlikely to be recovered = default = "unrecovered" money
The followed up for defaults can be complicated but just treat it as your money is gone for good