Originally Posted by
SilverBack
I have been investing in Harmoney for nearly 2 years now and currently I have placed in excess of 1200 loans.
I thought I would share some thoughts following the recent adoption of a new scorecard. Please excuse me if I repeat some things already commented on but I may have some fresh thoughts all the same.
Interest rates have been lowered. Who is the winner? Why Harmoney, all the way of course. Their return is based on fixed fees while they run NO risk from defaults because it is your money that is lost (recognising that they have structured their fees to cover their costs in managing defaults). They also have a fixed rate of return independent of what the borrower pays. Any reduction in rate is borne by you and NOT Harmoney, as I will soon show.
As the lender you now face a reduced return. Of course you can decide to quit making loans at any time.
My analysis across all my loans is that the actual rate that I receive when a loan when it is repaid is approximately 5% p.a. LESS than the headline rate. That is before tax but after Harmoney fees. A reducing proportion of my loans are on the old scale of 1.25% of interest plus repayments while most of the rest are on 17.5% of gross interest with about 100 at 20% of gross interest. To date the 5% deduction from the headline rate of a loan is a good guide. It does vary a little bit from loan to loan but that continues to be a good guide for my portfolio. I do expect the 5% to increase as my older loans are paid off because the change in the service fee from 1.25% of total repayments to 20%/17.5%/15% of gross interest back in 2016 resulted in a substantial gain by Harmoney. Oh yes, Harmoney made out they were responding to complaints about the service fee going on principal repayments but they took advantage to increase their income substantially when they introduced the new scheme.
Now, the real point of my post is that when Harmoney reduce the headline rates for borrowers they still get approx. 5% on each and every loan but you the lender will suffer the reduced income. Hence, as a private investor, it is foolish to take up an "A" loan category loan with headline rates of 6.99%+ because that will leave you with an effective 1.99%+ interest after fees (more or less). From that you need to deduct the expected default rate. Also, this is for an unsecured loan over 36/60 months. You can get better than that from a bank deposit over the same period with a very low risk rating (close to nil). Hence, I say you are foolish to invest in Harmoney's lowest interest rate loans. If you can tolerate risk (which you must do in order to invest with Harmoney), then finance companies give a better return than most of these A loans.
Don't forget that for private investors like me, defaults are NOT tax deductible and they can seriously affect your effective return. At the moment I lose 21.5% of my net interest (i.e. after tax) on defaults and I am on a low tax rate. These defaults are on top of the effective 5% taken by Harmoney. I have a diversified portfolio with over 90% in the B, C and D grades. My recent RAR is over 16% and so I am not complaining about that but the RAR will now reduce as the new schedule takes effect and as I replace paid off loans with new ones.
There is more I could say from my onging analysis but this is enough for one post.