Investment risks
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.
Credit risks
Borrowers who are lent investors’ funds may delay making their repayments or default on loans. The sole recourse for repayment is to the borrower. There is no security for the loan and no person guaranteeing the loan. Where a borrower fails to make payments Investors will not receive part or all of their principal and interest payments that are due to them.
Harmoney has robust systems to determine the suitability of a Borrower and his or her ability to afford loan repayments. Harmoney may take debt recovery steps, which may or may not recover any funds. Harmoney may also sell loans to a collection agency or third party. If it does so, Investors will receive a proportionate share of the net loan sale proceeds.
Borrower risk
Lenders may be affected by differences in the creditworthiness of borrowers in the event of late payment or default. In addition, a borrower’s creditworthiness may change over time, reducing potentially their ability to repay a loan. Harmoney’s assessment of a borrower’s creditworthiness for a loan is made as at the date of their loan application. If a borrower does not repay their loan Harmoney will take debt recovery steps and may sell loans to a collections agency or third party, as outlined above.
Liquidity risk
Lenders may suffer loss from other events through their inability to sell a loan investment or demand early repayment (should they need their funds early). Harmoney’s licence terms do not permit secondary trading of investments and lenders cannot demand early repayment of a loan. Only Harmoney is entitled to require borrowers to repay the total amount outstanding on a loan if borrowers breach their loan contract.
Lenders are only able to withdraw funds if they have funds available in their lender account. Lender funds may also need to remain on loan beyond the initial term if the borrower(s) to whom their funds are lent have not repaid their loan(s) in full when they fall due.
Fraud risk
Harmoney has a thorough and robust credit assessment process to guard against fraudulent applications. There is, however, a risk 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 also fabricate their expenses, liabilities, or 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.
Early repayment risk
A borrower can repay his or her loan at any time. Should a Borrower decide to repay early, then an Investor will not receive the total interest income that would have been earned had the loan run to its full initial term. Current experience shows that a substantial proportion of loans are repaid before maturity.
Concentration risk
Investors 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 Investor some protection from a borrower default.
Operational risk
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 an unforeseen disaster. Should any of those events occur, this could have an adverse effect on Harmoney's financial performance and on the performance of loans.
Regulated loan risks
Borrowers generally have protections under the Credit Contracts and Consumer Finance Act 2003 ( CCCFA). Investments in loans may be affected if a Borrower exercises certain rights under the CCCFA, including seeking a repayment variation due to hardship (which may affect the length of time taken to repay their loan).
Macro risks
There are several factors that may affect Harmoney's Peer-to- Peer Service over which it has little control. These include an economic recession, political turmoil, changes in interest rates, natural disasters, and terrorist attacks, some of which may affect a borrower's ability to make loan repayments.
Harmoney regularly monitors local and 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 and the performance of loans.
Cybersecurity risk
Harmoney is an online web-based business. As such, Harmoney relies heavily on information technology and computer based- systems that could be a target for 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.
Legislative and regulatory risk
Failure by Harmoney to comply with (or changes in) laws, codes of conduct and policies could result in loss of Harmoney's peer- to-peer licence, in legal action, and in financial loss.
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.
Estimated defaults and losses
An estimated annual default rate is the probability that a loan will default in each year of the loan - it is an annual 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.
Although the rate is shown as a consistent annual rate in reality defaults are more likely to happen in the first 2 years of the loan as can be seen by the hazard curve below.
Estimated default rates by risk grade
Each loan in the marketplace has a estimated default rate based on its risk grade. It is important to understand that this is a estimated rate and the actual default rate may vary from the rate shown. Information about actual default rates will be published as they become available.
The table below shows the estimated annual default rate for applications approved after 6 November 2019, under scorecard 1.6. There will be a 60-day period in which the platform will list some loan applications that have been assessed and priced using the previous scorecard (Scorecard 1.5) as well as some other loan applications that have been assessed and priced using the new scorecard and pricing model. This is because borrower approvals remain valid for up to 60 days.
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| A1 | 0.02% | |
| A2 | 0.05% | |
| A3 | 0.06% | |
| A4 | 0.07% | |
| A5 | 0.09% |
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| B1 | 0.11% | |
| B2 | 0.13% | |
| B3 | 0.16% | |
| B4 | 0.20% | |
| B5 | 0.25% |
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| C1 | 0.32% | |
| C2 | 0.42% | |
| C3 | 0.55% | |
| C4 | 0.73% | |
| C5 | 0.96% |
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| D1 | 1.24% | |
| D2 | 1.59% | |
| D3 | 2.01% | |
| D4 | 2.50% | |
| D5 | 3.05% |
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| E1 | 3.63% | |
| E2 | 4.25% | |
| E3 | 4.90% | |
| E4 | 5.56% | |
| E5 | 6.25% |
| Estimated default rate p.a. | ||
|---|---|---|
| Grade | Scorecard 1.6 | |
| F1 | 6.98% | |
| F2 | 7.67% | |
| F3 | 8.31% | |
| F4 | 8.95% | |
| F5 | 9.56% |
Hazard Curve
The estimated 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 the profile of the hazard curve of the personal loan portfolio to date and shows that almost 60% of the defaults that have occurred may been within the first 15 months of the loan.