Selling Loans with a Discount on Bondora
When Bondora first introduced the secondary market, discounts and mark-ups were limited to + or – 5%. Over time, people complained that this did not give them enough freedom to further discount a loan that they really wanted to get rid of, albeit at a large loss. So they lifted the limitation and loans may now be sold with any kind of markup or discount.
The current range is between -90% to +40%, which is astonishing. A 90% loss is certainly a big deal, but it is still better than a 100% loss if the loan is not paid back.
So what is the probability that a loan is sold at different discount percentages? I’ve looked into the data. The results can be seen above.
Note: I did not include data on loans with discounts that are higher than -65% because, as you can see, -65% already practically guarantees a successfull sale.
For those who always tried to sell their loans at -5% discount up to now, this is bad news, because it means we have to go lower with our offer to increase the chance of selling.
The chart indicates three groups of probabilities for certain discounts (excluding markups because we only look at discounts for, presumably, overdue loans):
- 5% to 25% discount : the probability actually decreases the higher the discount. Why? Maybe the buyers think: ‘If he’s that desperate to get rid of the loan, there has to be something wrong with it that I don’t know about…’ Only about 40% of loans in this group are actually sold successfully.
- 25% to 60% discount : at this point the worries of the buyers seem to be counterbalanced by the deep discount, so they seem to be saying: ‘Something may be wrong here but even if it is, such a big discount should make up for defaults.’ In this group, the likelihood of a successful sale rises to about 55%.
- 65% and beyond : at this point, the discount is so steep that the low quality of the loan does not seem to matter anymore, so the loans are bought no matter what with a 100% probability in this group.
What does this tell us about the secondary market’s overall structure?
It tells us that to sell with good (>50%) probability, we need to apply discounts of 30% and more. There’s not much use to selling otherwise. But at this kind of discount, you have to think about whether selling is really worth it. If Bondora really does recover a large part of the defaulted loans, maybe it’s better to not sell all overdue loans and accept that some of them will default no matter what.
It looks like the overall rate of 60+ days overdue loans is about 8.2%, so as long as your defaulted loans make up less than that percentage, your portfolio is looking better than the Bondora average!