Bidding and fund matching

Financial planning Written by 2268, Nov 9 2017

So if you've ever had a question around how funds are matched, how the bidding system works and what the ‘best’ method is, read on.

Just a reminder that we can’t offer financial advice on how you should structure your investments, however we can provide some facts on how the platform works, so here goes:

Funds matching

The lending platform facilitates matching your investment orders to loans awaiting funding once every 30 minutes. For every loan awaiting funding, the platform searches for all available investment orders for the same loan term as the loan awaiting funding. It sequences the available investment orders by:

  • the interest rate specified by the investor on each investment order (lowest to highest); and then by
  • the date the investment order was created (oldest to newest) i.e. on a first in, first matched basis.

Once this sequence is determined, the platform matches off as many investment orders (in that sequence) as are required to fulfil the loans awaiting funding to those loans (in full or partially). 

It is important to note that a loan needs to be 100% funded before investment orders are allocated to that loan e.g. if a $10,000 loan requires funding and you have placed a $6,000 investment order which is top of the investment order queue, we would need a further $4,000 worth of investment orders before matching occurs.

If multiple investment orders are required to fulfil a loan awaiting funding, and there is a difference in the investor interest rate on those investment orders, all investors receive the highest interest rate on those investment orders. For example, in our $10,000 loan example, let’s say that it consumed two investment orders – one with a bid interest rate of 8.50%, and another with an 8.60% interest rate – in that example, both investors would receive 8.60% for their investments that are matched to that loan. So the investor rate you bid is the lowest you’re willing to accept, but it may be higher, as in the example above.    

Difference between the investor rate and the borrower rate 

When we lend money from the platform, there is always a difference between the rate that is paid to investors and the rate that the borrower pays. Why the difference you ask?  The various components of the average loan are shown below:

 

 

  • Borrower Rate – the interest rate offered to the borrower. It is determined during the risk grading process. The offer to the borrower is made before the loan is matched to investment orders. The average borrower interest rate to date has been 12.1%;
  • Squirrel Money Margin – the platform margin paid to Squirrel Money on each loan. It is a fixed rate per risk grade and varies from 0.95% for A grade loans to 2.95% for D and E grade loans (the average is 1.84%);
  • Reserve Levy – the residual rate remaining after deducting the Squirrel Money Margin and the Investor Rate from the Borrower Rate. Currently this is circa 1.9%;
  • Investor Rate – the maximum bid rate on the investment order(s) utilised to fulfil each individual loan. As mentioned earlier, the average return to investors has been 8.42%.

We occasionally get asked what happens to any extra margin generated when Investor rates are reducing. As described above, given that the borrower rate is established first and the Squirrel Money margin is a fixed rate by risk grade, any extra margin created in the lending process is absorbed into the Reserve Fund – for the benefit of all investors. 

What we have seen in the last month or so is that, due to a surge in the supply of investor funds, investors are bidding down the investment order rates to get their investments into loans faster. We see this as a normal supply and demand dynamic that is a healthy sign for the peer-to-peer platform – that will ultimately provide further investor security by bolstering the Reserve Fund.

Bid size

The minimum bid amount for an investment is $500. The maximum you can invest through our platform is $2 million. So, you’re free to bid anywhere within in this range.

Due to the ‘funds matching’ process described above, any investment order that you create could be allocated to one or multiple loans. 

The Reserve Fund helps protect investors from individual borrower default – so you don’t need to spread your risk across multiple loans and therefore shouldn’t need to create numerous small investment orders. For more information about how the Reserve Fund operates, please click here.

One thing worthy of consideration however is how the Secondary Market operates should you ever wish to try and sell your investment. See an overview of the Secondary Market below.

Secondary Market overview 

The Secondary Market provides investors with an opportunity to access their funds early should another investor be willing to match the original terms of their investment.

To initiate the sale of one of your investments, you simply place a sell order on that investment and the Squirrel Money platform will then look to match the loan against investor bids in the system in exactly the same way it does for new lending. If an investor can be found that matches the rate and remaining term, and they accept the investment, then the loan is transferred.

As with borrower loans, when selling an investment through the Secondary Market, the entire investment for sale will need to be filled with willing alternate investors before the sale can be completed. With larger individual investments, it may therefore take a little longer to on-sell that investment. Slightly smaller investment ‘chunks’ may well be easier to on-sell quickly.

Squirrel bids in the platform

Sometimes it’s necessary for us to make bids on the platform. We don't bid on any loans for the first 24 hours after they are offered to the platform to allow regular investors a chance to bid on the loan. If the loan remains unfilled after than point, we bid in at the maximum investor rate for that loan term to enable the loan to settle. 

The Squirrel investment in that loan is then immediately put up for sale on the Secondary Market. Essentially, we only bid when there is a shortage of investor funds to get loans settled in a timely fashion. Due to the high availability of investor funds currently, Squirrel hasn’t needed to fund any loans lately and currently only holds investments totalling around $1,400 which is made up of a number of small loan portions that individually are too small to on-sell. 

We can help. Have a chat to one of our advisers.