Finbee is a small p2p lending marketplace for consumer loans in Lithuania (see earlier coverage). I have been using it as an investor for a little over a year now. My strategy on Finbee is different than on other marketplaces. I invest loans mainly with the purpose of trading in mind, that means on Finbee I don’t plan to hold the loan parts to maturity
Finbee secondary market basics
- Loans can be offered at a discount, par or premium
- Seller pays 1% fee upon successful transaction
- Only loans with at least one repayment can be offered. This means I cannot sell loans directly after acquiring them on the primary market (no flipping). I have to hold each loan for at least 30 days.
- Late loans and loans in arrears can be offered. Loans that are 60+ days overdue cannot be listed for sale.
- Maximum listing duration is 20 days; thereafter seller can relist
- Buyers can buy instantly at ‘buy now’ price or make a bid, hoping that no other buyer overbids them in the remaining listing duration (or pays buy now price)
How I select loans on the primary market
I mostly invest in ‘D’ loans (that is the most risky rating) with long loan durations (>36 months) and high interest rates. The average interest rate in my portfolio is 32%, the maximum 35%. My reasoning for this choice is that these loans allow high markups and still offer an attractive buyer yield (XIRR value). The longer the remaining loan term is, the lower will be the impact of the markup on the calculated yield for the buyer. I mostly buy 40 Euro loan parts, sometimes multiple in the same loan. I selected this amount because larger parts might not appeal to as many buyers, as some investors only invest small amounts.
Why I select different values for the reserve price and the buy now price
Since the XIRR that is displayed to the buyer depends solely on the buynow markup, it would seem logical to set same markup prices for the reserve price and the buy now price, doesn’t it. If in the example above I would set the price to 8.4% for both than I would get 8.4% markup if the sale takes place. With 8% and 8.4% values, I most likely get only 8% (at these markups there are very rarely multiple bidders competing). So why would I forego 0.4% gain? The reason is simple. With buynow the sale takes place instantly. But if I get the buyer to make a bid, the transaction takes place at the end of the listing duration, and all interest accrued during this duration is mine. Note that the buyer can NOT back out. He is commited and the sale will take place if he made a bid. In the above case the 20 days on a 39 Euro loan part at 32% mean I earn an extra 0,68 Euro (39€*32%/365 days*20 days) interest. So in effect if someone bid 8% on this loan my gain is 8%+1.74% accrued interest = 9.74% gain (which is much better than the 8.4% buy now). Of course I have to deduct the 1% seller fee.
BTW, I wondered how Finbee manages the sales with the accrued interest. When the buyer makes the bid, as said he cannot back out. But it is not clear if he will win (another buyer could overbid him) or how much interest will accrue for I as the seller have the right to accept the bid anytime early (which would only make sense if my cash is zero and I urgently want to bid on a new loan with a much better interest rate). But Finbee can’t wait until the time of sale because at that time, there could possibly be not sufficient cash in the buyer’s account. I couldn’t figure it out, therefore I asked Finbee. The answer is Finbee reserves the maximum possible price (principal+premium+maximum possible accrued interest) at time of the bid in the buyer account. Once the sale takes place, if the actual accrued interest is lower than the reserved maximum accrued interest, part of the amount is freed up.
How I even make a gain when selling late loans at discount
I try to sell all my loans that are late or in arrears. Naturally I need to list them at a discount, to make them attractive for buyers. You’d assume that I make a loss selling at discount, but since even these overdue loans sell with all accrued interest that means I can sell even these loans at a profit. Once again, it is advisable to set different prices for reserve and buy now to let the interest accrue longer.
This loan was late and I sold it at 1.6% discount, meaning 0.63 EUR cost for the discount and also 0.4 EUR cost for the seller fee. But I got 1.70 EUR accrued interest paid by the buyer meaning I made an overall profit of 0.67 Euro on the sale of this late loan
Don’t late loans get snapped up if they are offered at discount and turn current again?
It seems the loans are automatically removed from the secondary market if their status changes. I have yet to find out, what happens if there is a bid on the loan part already when the status changes.
Since at least one repayment is required before a loan can be put on sale, any loan that goes late on the very first repayment is cannot be sold. If that happens I might have to hold the loan to maturity unless it catches up and becomes current again and I sell it then (EDIT: Another investor informed me that it is not possible to sell loans, once they received at least one payment from the compensation fund – another useful information I did not know yet).
The user interface for the secondary market could benefit from some improvements. I found several inconsistances in the reports. When I checked with Finbee all but one turned out to be display bugs. So they did not impact my trading performance, but they sure made it harder for me to understand how the secondary market works.
My preliminary results using this trading strategy
I succeeded in selling many parts at premium. The average premium achieved is about 6% (which roughly equals 2 month interest if I had alternately kept the loan), the maximum so far is 12.2%.
as you can see in the following screen shot my trading earnings make roughly one third of the earnings with the other two third coming from interest earned.
However the risk is that loan parts that never make a first repayment, cannot be sold. I currently hold 480 EUR in these loans. I expect the compensation fund will at least cover part of this loan amount. Or if the loans should recover, I will quickly sell them. My yield will be highly dependent on the final outcome of this loans. As you can observe, my trading strategy comes with high risk.
I don’t plan to use this trading strategy on the long run. I see it just as an experiment to employ a strategy that’s different to hold-to-maturity and gain some first-hand insights into the dynamics that are active on a secondary market. Whether this experiment will end with profit remains to be seen.