This question is prompted by the recent change by Funding Circle
from variable rate bidding to fixed rate loans for lenders. For me, and majority of the UK PtPL Lending Community
(reflected by the Independent Peer to peer Lending Forum) the answer is probably
NOT.
Unsecured Loans and Defaults
The biggest problem with Funding Circle is that most of
their loans are unsecured. This means
that the lender is unlikely to get much money back should the borrower
default. In my case I currently have
losses with Funding Circle, due to default, of £628 with only £48 recovered so far. This reduces my projected interest rate of
8.5% (based on Funding Circle’s loss statistics) to an actual rate (after fees
and losses) of 7.6%. This rate is
falling as the defaults increase.
Lower Lender Interest Rates
Funding Circle’s new fixed rates are surprisingly low and
result in a projected actual interest rate of around 7% for the higher risk
bands (A, A+) again based on Funding Circle’s (optimistic) statistics. My own experience would suggest actual
interest of around 6%. In practice, since
fixed rate loans were introduced, a bigger proportion of loans currently
offered are A or A+.
The other large PtP Lenders such as Ratesetter and Zopa have
contingency funds to cover defaults but with Funding Circle all the risk is
passed on to the lender. For me, short term asset-secured lending at an interest rate
of around 12% is much more attractive.
Should the borrower default then I know the asset will sold I should eventually
get all or most of my money back.
However, Excellent Liquidity
However, one advantage of Funding Circle is excellent
liquidity. They have an efficient
secondary market allowing people like me to gradually sell my existing loans at
a premium rather than waiting for them to run for the full term. In contrast, Ratesetter has unspecified, high
penalty charges should you wish to pull your cash early.
Funding Circle Going for Growth
I think Funding Circle have made a reasoned business decision
to focus on growth, with expansion into various European countries and greater
reliance on institutional investors and a simplified approach. In
doing this they have deliberately turned their back on the early adopters and
small, entrepreneurial investors that PtPL was originally all about.
Thankfully there are several smaller platforms such as Saving
Stream, Funding Secure and Money Thing who are working closely with the PtPL
community in order to meet their lending needs and provide the necessary deal
flow to absorb the money released from the bigger platforms, such as Funding Circle,
now offering lower interest rates to lenders.
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