Platform update: factoring in available funding in the loan application process

In the beginning of the summer we set our focus on fighting a problem that was constantly raised by both Investors and Borrowers: namely, some of the loans that are brought to the Primary Market do not get sufficient funding and are eventually cancelled. As the result, Borrowers do not get loans and need to reapply again, while investor capital is locked for about a week without producing any return.

We have identified the following root causes of the problem:

  • When applying for a loan, Borrowers do not have the means to understand the likelihood of getting a loan on our platform;
  • Investors do not have the means to predict the funding rate a given loan will achieve and make a knowledgeable decision whether it is worth placing a bid.

In order to address the issue, we will be introducing changes to the loan application process, which will result in Borrowers only receiving loan offers that have high likelihood of getting funded by the Investors. We have developed the functionality using predictive analytics modelling and historic data on the funding to evaluate with high precision the maximum amount a given loan applicant can borrow on our platform.

Here is an example of how the changes would affect the loan application process:

  • CURRENT PROCESS: A borrower would like to borrow EUR 3,000 for renovating her apartment. However, given the information in the loan application the loan gets only EUR 2,000 in funding from investors and is delisted from the Primary Market and cancelled in 7 days.
    • Outcome: Borrower would have accepted EUR 2,000 offer had she known that this is the maximum amount she can borrow, yet, investor funds were frozen for a week and the loan was eventually cancelled.
  • NEW PROCESS: A borrower would like to borrow EUR 3,000 for renovating her apartment; however, our system evaluates that the maximum amount she can borrow is EUR 2,000. Thus, the borrower is not offered EUR 3,000, but only EUR 2,000.
    • Outcome: Borrower decides that she can cut her renovation budget to EUR 2,000 and accepts the offer. The loan is successfully funded and issued.

We realize that as the result of this change we will not be able to serve some of the loan applicants, as there is no funding available on the platform for certain segments of borrowers. Yet, we believe this is fair to notify the applicants about the lack of funding right away and avoid locking investor capital in loans that are not eventually funded.

As the system will pre-calculate funding available for a given application (and will not allow loans to the market that don’t have high likelihood of being funded), we are also removing the rule, that requires a listing to reach 75% funding for the loan to be issued, for its irrelevancy.

We expect that the changes will serve both our Borrower and Investor by better aligning the interests of both parties.

UPDATE: Some of the Investors reached out to us suggesting that performing supporting document and applicant data checks before moving a loan application to the Primary Market, can further help with resolving the issue of locking the Investor capital in the loans that are not eventually funded. This change is already in the works and will be released in the nearest future.

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10 thoughts on “Platform update: factoring in available funding in the loan application process”

  1. In my opinion that makes absolutelly no sense. If someone applies for 3,000 than 3,000 is needed, and not 2,000.

    Bondora has three other idle ways to speed up the funding which are also whished by almost all investors:
    – Changes in the portfolio manager (e.g. possibility to differ between countries and between verified and non-verified loans)
    – the portfoliomanager should make bids immediatelly when a new loan is on the market, and not only two times a day
    – and the most important change: please stop putting loans on the market before the data-check and the rating is completed. The high number of loan cancellations are extremely cruelling for us investors.

    Bondora please keep in your mind that improvements in a more investorfriendly portfoliomanager (as described in the first two above-mentioned points) would lead to the certain event that a high number of investors would come back to Bondora with fresh money. And that fresh money is also a benefit for borrowers as it is the alpha and omega that loan applications will be filled in a little while.

    1. Hello!

      Thanks for the feedback, always much appreciated.

      Portfolio Managers are bidding each 2 hours as of last week and we are working to further increase bidding frequency (with the ultimate goal of Portfolio Managers bidding immediately, as you suggest).

      Supporting documents and data-checks will be performed prior to moving a loan application to the market in the nearest future. We are already working on this change.

      Jevgenijs

    2. Changing documents before putting a loan onto the market is not a “change”,it just rolls back how things were done before the “improvements”. The same applies for having Portfolio Managers bid immediately.

      I can tell that I will not use the portfolio Manager at all if I do not have not the possibility to set the Portfolio Manager with all critiera I need to select the right loans. If you will reinstall immediate bidding of Portfolio Managers, I hope that you have enough investors with Portfolio Managers to fund the loans as I expect the more investors will turn away from Bondora.

  2. I am quite positive about planned changes. I also propose not to cancel funded loan if reason of cancellation is “better” rating. if user applied for loan being D@28% and got it funded, it means he is happy and no need to cancel loan if risk manager see that guy may get C rating.

    1. Hello, Andrej!

      Thanks for the feedback! Loan cancellations due to discrepancy between provided and actual information will be sunset completely, after we stop moving loan applications to the market before reviewing applicant’s documents (due in few weeks).

      Jevgenijs

  3. >while investor capital is locked for about a week without producing any return.
    This is not an actual problems. Bondora has a lot more actual problems to solve.

    Immediate autobidders will result that active investors leave the marketplace. (Those who are unhappy with autobidder options). At the moment we still have the possibility to manually invest…
    Probably it is Bondora’s stategy but it is a pity

    1. >while investor capital is locked for about a week without producing any return.
      This is not an actual problems. Bondora has a lot more actual problems to solve.

      What you mean not a problem? Aleks, this is a problem, at least for me and number of other investors

  4. If the focus is on the Portfolio Manager effectively getting the opportunity to bid on new loans (within 2hrs) that come onto the market I can see this pushing out the active loan investment managers. The model you are heading towards is fine but you need to look at the Portfolio Manager to give more flexibility on selection of loans to invest in. Currently you can put a percentage of your funding and a credit rating. This needs to go a lot further as there are people reviewing their currently loans and profiling the types of loan they are willing to invest in going forward to maximize their returns. Areas that I am starting to look into are are age, occupational area, country, region, credit rating, home ownership type, marital status, dependents etc.

    Interested to see how the Portfolio Manager progresses. Bondora’s KPI is the Portfolio Manager and the ability to cherry pick loans, don’t take that away from your investors!

    1. Mike,

      your requests are not new to Bondora. Many other active investors and me have tried to convince Bondora to implement a better granularity of the portfolio manager in order to achieve above average returns. Actually, the portfolio Manager in 2012/2013 had way more options (including country) as the current. Guess why?

      Here is the catch: Bondora is not primarily interested in increasing your personal return. They want to focus on scale. They want to fund as many loans as possible, because the funding fee as well as the loan managment fee are the primary income sources for Bondora. So they will keep the portolio manager as simple as possible. It is a take it or leave it approach. – Allowing the portolio manager to filter loans by countries is a wish that will not come true. Having “underestimated” the market entries in Finland, Slovakia and Spain which are proven by several “KPIs from investors that crunch the numbers”, investors are, at best, reluctant to take these loans, so they will never allow filtering by country in order to be able to grow outside of Estonia.

      As long as there are investors out there that fund loans solely based on Rating (via portolio manager, nothing will change.

      More to come:

      Bondora promised to have the API-access ready Q3/2015. This may be a relieve for those looking for above than average loans. But… Bondora tries to have institutional investors onboard to fund loans. There will be even less supply for private investors so the residual will be soaked up quickly by the portolio managers.

    2. Unfortunately with Bondora it could be always so, that if private lenders will build good API+scoring (better than some special customer of Bondora), API will be changed in order to close such possibility. Or API calls will go to “queue” to allow some special guys or Bondoras PM to get good segment bids.