Harmoney

[Harvey Specter]

Last I read of the borrower T's and Q's people can repay their loan early for no penalty.

I appreciate that but question whether it is right??

For what its worth my thoughts are that with all the dozens of finance company failures during the GFC what did we learn ? Basically a disturbingly large percentage of consumer credit goes bad in a GFC so in a GFC MK2 I'd expect lenders to get thoroughly belted. Makes this a fair weather investment only doesn't it ?

Really. I though the finance company's were brought down by over lending on second mortgages to questionable property developments.

Consumer credit requires the borrower to either leave the country, go into hiding or declare bankruptcy for the debt to go bad doesn't it?

I will be watching for an increase in consumer default but given share prices also fell during the GFC, the main disadvantage of Harmoney is that the investments are completely illiquid until such time as they introduce secondary market. That is one reason why I favour 3 year loans (over 60% of mine).

[Beagle]

I appreciate that but question whether it is right??

Really. I though the finance company's were brought down by over lending on second mortgages to questionable property developments.

Consumer credit requires the borrower to either leave the country, go into hiding or declare bankruptcy for the debt to go bad doesn't it?

I will be watching for an increase in consumer default but given share prices also fell during the GFC, the main disadvantage of Harmoney is that the investments are completely illiquid until such time as they introduce secondary market. That is one reason why I favour 3 year loans (over 60% of mine).

Lessons about Consumer credit from my experience with Geneva Finance.

1. Many people simply walk away from loans when times get difficult, others shift their address without telling their creditors.
2. Lend money to monkey's and they'll misbehave as sure as night follows day
3. There's the new short form bankruptcy procedure, no assets, liabilities under $40K that's only a 12 month one off from of bankruptcy that's costing consumer finance companies plenty http://www.insolvency.govt.nz/cms/fi...key-points-nap This is especially useful for people with credit card / consumer debt who's car has died. This relatively new procedure has become a nightmare for consumer finance companies.
4. If people are borrowing at high interest rates the only reason for this is the mainstream lenders have declined them, more often than not for very good reasons.
5. Even if you do get into an amended scheme of arrangement with loan defaulters they often don't make their payments or the payments are at some pathetic rate like $10 a week.
6. If borrowers don't have serious skin in the game, (like a decent 40% deposit on that car) and if serious mechanical problems ensue then option 3 can become more attractive.
7. young people are notoriously unreliable with consumer credit, sorry but they are.
8. Late payers and defaulters usually require weekly micro management which from an administration perspective is extremely onerous and time consuming.
9. Identity Fraud http://www.interest.co.nz/personal-f...pplying-credit
10. Conspiring with car / plant and equipment dealers to fraudulently hydraulic up the price to give the appearance of a proper deposit having been paid
11. Fraudulent alteration of supporting loan application documents for submission online, (easier than fraudulently altering them for application and inspection of documents in person)

[Harvey Specter]

Roger

1,2,4,6,10 Accept
3,5,8 This is the risk and I guess we have to hope Harmoney have their calculations correct in relation to the expected number of defaults. The rates I am receiving, account for expected defaults still have quite a large buffer for extra defaults over and above the rate I could get at the bank. Hopefully the risk/reward balance is correct.
7. you can control when choosing loans. The worst loan in my opinion is a young person wanting to go on an overseas trip. High risk they will like it and never come back (or more likely, plan a OE once they return).
9 Hopefully Harmoney has this covered.

I generally go for:
- small loan balances (so if their only debt, not worth dong short form bankruptcy)
- where the payments are less than 10% of income (gives buffer should they hve to take a lower paying job)
- which are 36 months (hopefully you would have received most your money before they default)
- over 30 (ie. not young)
- not for a holiday (dont trust someone who borrows at 20%+ for a holiday)

[Beagle]

Hi Harvey

I like your front end filters. Honestly I don't know enough about their front end checks, operational procedures and methodologies for dealing with delinquent debtors to comment further.
I would say however that while fuel prices are low, this should be of significant assistance to people with consumer credit so delinquencies are likely to be lower than historical norms.
Good luck with it.

[Harvey Specter]

Thanks. It is only small money for me, and even compared to others on this forum who have invested a lot more.

[emveha]

As a sidetrack while we are on the topic of service fees. Other P2P platforms refund the investor the service fees charged if the borrower defaults.
I think this is a good incentive for the platform (e.g. Harmoney) to ensure their underwriting process is robust and not simply approving loans to get the loan origination fee upfront.

I agree. Otherwise Harmoney has too much incentive to push down their risk estimation.

[Bjauck]

Sorry if this has already been covered. I have just been looking into Harmoney and I was wondering - with Harmoney whether your loan "notes" that become bad debts or delinquent during the year could be deducted from your interest for tax purposes.

For example during the year, if you have $10,000 invested with Harmoney you may have earned $1500 interest but also $500 of your notes became uncollectible (even after Harmoney collection procedures). Would you be able to deduct the bad debts of $500 from the $1500 interest so that you would just declare $1000 income from Harmoney?

I know with listed bonds that if you sell the bond for a capital profit that profit is taxable whereas if you sell the bond for a capital loss it is not always deductible (for example where it was due to a reduction in credit worthiness). There is a type of lop-sided capital gains tax by stealth in NZ on financial arrangements.

[unhuman]

No, it would be a capital loss.

The way Bad Debts work is that it is to offset income that has already been recorded but will not be received.

i.e. if you are a business and make a sale on credit, income is recorded. However if that credit goes bad and the income will never be received then you offset the income with the Bad Debt expense, thus the overall effect is nil.

With Harmoney, the loan payments are capital repayments, not income. Thus any payments not made are capital losses and not Bad Debt expenses.

[noodles]

No, it would be a capital loss.

The way Bad Debts work is that it is to offset income that has already been recorded but will not be received.

i.e. if you are a business and make a sale on credit, income is recorded. However if that credit goes bad and the income will never be received then you offset the income with the Bad Debt expense, thus the overall effect is nil.

With Harmoney, the loan payments are capital repayments, not income. Thus any payments not made are capital losses and not Bad Debt expenses.

Interesting. So unless you are setup as a trading company, you could not account for your capital losses? I.e You would be paying too much tax

[Bjauck]

No, it would be a capital loss.

The way Bad Debts work is that it is to offset income that has already been recorded but will not be received.

i.e. if you are a business and make a sale on credit, income is recorded. However if that credit goes bad and the income will never be received then you offset the income with the Bad Debt expense, thus the overall effect is nil.

With Harmoney, the loan payments are capital repayments, not income. Thus any payments not made are capital losses and not Bad Debt expenses.

Thanks for your answer. The taxation of financial arrangements rules blur the distinction between capital and income.

So, if you loan someone $1000 through harmoney and they pay back $500 plus $150 interest in the year, before being judged bankrupt, then you will have to return $150 as income. Even though the "financial arrangement" actually resulted in a loss for you of $350 (+500+150-1000).

If that is the case, it seems unfair that no allowance is made for that capital loss. When for example, you have to pay tax, under financial arrangement rules, on a capital profit when you sell a bond.