Jun 20, 2017

P2P Investing: Financial Model

This is a growing industry and with that has given the average retail customer better access to such investing opportunities. I am talking about P2P lending platforms and P2B if you can find it. The idea is you invest in debt and make monthly returns. The facilitator is the platform and they will charge a fee for use.

*Update: Added a printable ready specific summary tab for 10-year time horizon as well as charts to fit 55/25/10 year on the visuals.

What I was interested in figuring out was what kind of returns one can make if they take their monthly interest payments and keep re-investing it. This is one of the nice features about such platforms because you can use 'loan parts' in order to keep compounding your money assuming your interest returns are too small to re-invest in an entirely new loan offering and/or there are no offerings currently available.

The key to this is maximizing the time you are invested a.k.a. minimizing your cash drag. It is inevitable that there will be some down time for your cash, but making this time as small as possible will help your returns grow more quickly.

I made a financial model for this type of investing that takes into account cash drag, annual net interest rate, and assumes all interest earnings are re-invested each month for up to 55 years.

There are also a few nice tools and visuals to help you build the investing case. I have made notes and comments in the model where necessary so you can easily understand what is happening in any tab.

Some of the more complex calculations such as IRR are possible to do with this by assuming the cash in/out is cash in/out of your bank. So you have initial cash investment, any withdrawals/deposits in the investing period, and then the exit value (all interest accruals and net deposits).

This space will offer a variety of returns and facility types. With that, the returns you can get will vary based on how risky the debt is. If I were to go and do this, my strategy would be to go for the least risky loans that have nearly the lowest default, but still have some risk embedded into the rate.

Also, it is important to keep yourself fairly spread out in order to smooth any default risk.

Be sure to research what your P2P lending platform does about defaults and what kind of actions they take as far as collections and/or late fees/default interest. My model assumes the effect of late fees/default interest 0's out the effect of capital loss.

One issue I did have is displaying returns while still taking into account a change of basis. There is not a clean way to do it, so the current model will display returns as a function of your initial deposit.

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