While Harmoney has taken significant measures to minimise risks during the loan application and approval process, they do exist and should be considered. We recommend consulting a financial advisor before making any investment decisions.
While Harmoney has taken significant measures to minimise risks, they do exist and should be considered. We recommend consulting a financial advisor before making any investment decisions.
The primary risk inherent in peer-to-peer lending is that Lenders may lose part or all of their principal due to loan defaults.
Harmoney has appropriate systems and processes for determining the suitability of a Borrower and his or her ability to afford loan repayments. The sole recourse for repayment is to the Borrower as there is no security for the loan, and no person guaranteeing the loan, Where a Borrower fails to make payments Lenders will not receive part or all of their principal and interest payments that are due to them.
Harmoney has a thorough and robust identity verification process to guard against fraudulent applications. However, a possibility remains that Borrowers may be fraudulent, with no intention to repay.
Borrowers may be the victims of identity theft, in which case the person receiving the money has misappropriated the details of the person whose identity has been used to apply for the loan.
Borrowers may understate their expenses or liabilities, or overstate their income. In such cases, they may be unable to afford to repay a loan and may default on their loan obligations. It may also mean that Harmoney assigns a risk grade which does not accurately reflect the Borrower’s risk and therefore that Borrower's ability to meet his or her loan obligations.
Changes to Credit Policy & Procedure risks
Harmoney regularly reviews its policy and procedure with regard to underwriting risk. Harmoney has a data science team tasked with producing analytical work to improve the quality of the decisions Harmoney makes as to the approval and risk grading of potential Borrowers who apply to list on the marketplace.
Amendments to the credit policy and process are made following a review procedure where either statistical or actual experience suggests that improvements can be made. More detail on this can be seen here . Even with this procedure in place, these changes may increase the credit risk of lending on the platform.
Liquidity risk is the potential for loss through being unable to trade an investment in order to convert the investment to cash, should the funds be required early. Loan investments cannot be traded without Harmoney's consent, and Harmoney's licence terms currently do not permit secondary trading of investments.
There are several factors that may affect Harmoney's business activities over which Harmoney has little control. These include an economic recession, political turmoil, changes in interest rates, natural disasters, and terrorist attacks, all or some of which may affect a Borrower's ability to make loan repayments.
Harmoney regularly monitors New Zealand and the global economic and business conditions in order to identify and assess any potential risks that may affect Harmoney's business operations. However, economic conditions are not always predictable, and significant changes in the New Zealand economy could have an impact on Harmoney's business.
Harmoney is an online web-based business. As such, Harmoney relies heavily on information technology and computer based systems that operate to provide protection from illegal hackers. Harmoney is very aware of this risk and therefore has security measures and systems in place that are designed to ensure the system's security. A security breach is a possibility and should this occur it may materially affect Harmoney's ability to operate and to provide access to loan information and loan recoveries.
Harmoney regularly monitors and updates its internal systems to seek to gain efficiencies and improve service standards and experiences. However, there is a risk of financial loss and/or damage to Harmoney's reputation if there is a failure of Harmoney's information technology systems, internal processes, people, or operating systems. This could also arise from external factors such as failure of a supplier to provide a service at agreed service levels or some unforeseen disaster. Should any of those events occur, this could have a material adverse effect on Harmoney's financial performance and on the performance of a loan.
Legislative and regulatory risk
Failure by Harmoney to comply with, or changes in, laws, regulations, codes of conduct, and policies could result in loss of Harmoney's peer-to-peer licence, in legal action, and in financial loss.
A Borrower can repay his or her loan at any time. Should a Borrower decide to repay early, then a Lender will not receive the total interest income it anticipated when the loan was made. Current experience shows that a substantial proportion of loans are repaid before maturity.
Lenders who do not diversify their investment across loans and risk grades could face exposure to a concentration of Borrowers of the same type. Having a spread of investments across various Borrowers and risk grades should provide an Lender some protection from a Borrower default.
Funds deployment risk
There may be insufficient new loans available that meet a Lender's criteria for investing, and consequently the Lender's Funds Available (being the funds it deposits in the Lenders Account for investment, together with any repaid principal and interest held for it in the Lenders Account for reinvestment) may not be able to be invested. To ensure this situation does not arise, a Lenders should regularly monitor its account with Harmoney so that the Lender can decide what to do with those funds.
Risks with Payment Protect
Lenders who fund a loan that has Payment Protect have the potential to earn a greater return on it, but also face additional risks.
First, if a Borrower notifies Harmoney of the occurence of an event for which the Borrower is covered, Harmoney will suspend payments from the Borrower while Harmoney assesses the waiver application. Consequently, there may be some delay before lenders receive payments while the claim is being processed.
Secondly, if an event occurs for which the Borrower has cover and the Borrower is entitled to a waiver, the lenders will not receive the waived principal, interest and loan repayments for the duration of the waiver depending on the level of cover chosen by the Borrower.
Thirdly, the Payment Protect fee is capitalised (i.e. is added to, and paid by the Borrower out of, the loan amount). Therefore, on occurrence of an event for which the Borrower is covered, in addition to not receiving principal and interest payments, the Lender will also not receive the Payment Protect Fee component of those repayments in the repayments.
Fourthly, if the Borrower repays the loan early (due to a prepayment or Rewrite) then the Borrower will be entitled to a proportionate rebate of the Payment Protect fee. As a result, the lenders will not receive all the additional principal and interest they would otherwise have expected in relation to the Payment Protect fee.
Depending on the level of cover the Borrower has taken, the risk will be different. If the Borrower has taken Complete cover, then they are covered for more events, therefore there is a higher probability of payments being waived than if they have taken Partial cover.
How Harmoney mitigates the risk
Harmoney takes the management of these risks seriously and has robust measures in place to minimise the likelihood of their occurrence and to mitigate their impact if they do happen.
Most importantly, the Harmoney platform allows lenders to diversify across many loans using fractionalisation. Diversification is an important action Lenders can take to mitigate risks.
Harmoney is run by a team with a strong track record in risk management. Our credit underwriting process has been rigorously tested by independent sources, and our proactive collections process is thorough and regimented.
You can find out more about how Harmoney manages risk in the FAQs.
Estimated defaults and losses
An estimated default rate is the probability that a loan will default with no further repayments are expected to be received. The rate is shown in the marketplace as an annual rate to enable comparison to the annual interest rate.
The principal loss to Lenders as a result of a default will depend on when in the loan term it is written off. The later in the loan term the more principal has been repaid and the loss to a Lender is lower.
Forecast default rates by risk grade
Each loan in the marketplace has a forecast default rate based on its risk grade. It is important to understand that this is a forecast rate and the actual default rate may vary from the rate shown. Information about actual default rates will be published as they become available.
|Grade||Forecast default rate p.a.|
|Grade||Forecast default rate p.a.|
|Grade||Forecast default rate p.a.|
The forecast default rates are shown as a consistent annual rate over the term of the loan. In reality, defaults are more likely to follow what is known in statistical terminology as a time-varying hazard rate. This chart shows a representative profile of the hazard curve of a personal loan portfolio. The curve shown is only for loans that do default and, therefore, adds up to 100%.
We expect that the default hazard rate of loans originated on the Harmoney platform will be similar to the one shown in the graph. As defaults happen within the first 18 months it means 36-months and 60-month loans will have a similar default hazard rate.