P2P lending is high risk low return. People often flock there for their seemingly high yields of more than 10% interest p.a. But the return is actually lower than you think.

Take an example: a note with 12% interest rate on website dashboard’s so called “Annualized Performance”, with platform fee of 15% on interest collected, and your effective tax bracket after relief is 21%. Your actual return is 12% x 85% x 79% = 8.06% p.a. Hang on a second: they don’t show you P-L gain after all those fees? They don’t.

This does not factor in the defaults you will suffer along the way. Let’s assume the default rate is 1%, and the average tenor is about 3-6 months. 1% default of 6 months notes mean = 2% of capital loss per year, and 1% default of 3 months notes = 4% capital loss per year. 8% actual gain - 4% default loss = 4% p.a., you might as well put fixed deposits.

1% default rate is damn good, some platforms estimate default rates to be 3%-5%, but in reality, platforms like MoolahSense Singapore is having 15% default rate. Which brings us to next point: do you know you are not actually betting on the notes, or the borrowers’ business and ability to repay, you are actually betting on the due diligence team hired by the platform?

For instance - do they properly vet through the borrowers? how good is their default probability model? do the autobots automatically spread your risk and not put your money on notes originating from the same borrower over and over?

How about the overall economy, a systemic risk such as recession, economic downturn will wipe out plenty of those notes. Investing in different notes, coming from the same team, from the same fragile economy is not diversification.

The interests gained are taxable too, do you want to manually report the meager double digit gains on your income tax assessment form? Probably not, but you risk getting jailed for tax evasion.

References

  1. MoolahSense Singapore default rate - https://www.moolahsense.com/statistics
  2. FS Malaysia default rate - https://fundingsocieties.com.my/progress
  3. FS Malaysia fees structure - https://intercom.help/funding-societies-malaysia/investors/service-fees-charges
  4. FS interest gains are taxable in Malaysia - https://intercom.help/funding-societies-malaysia/investors/tax
  5. FS default rate anticipated to be 3%-5% - https://www.theedgemarkets.com/article/news-first-p2p-lending-default-rate-remains-low

Errata

This copypasta may contain mistakes many people and I did not notice. If you have found any issues in it, hit me up at hello@anonoz.com.