Practical not Theory!
The financial press and social media are increasingly stuffed to the gills with hype about PtPL but most of it is so superficial. You have probably seen some of the headlines:
- ‘PtPL investment increasing by 200% per annum’
- ‘UK PtP is the fastest growth in PtPL per capita in the world’
But 99% of this stuff is written by people who have never actually DONE it! They have never signed up to even the simplest platform such as Zopa or Ratesetter and given it a try.
They therefore don’t really know what they are talking about. Hopefully you have arrived here because you are an ordinary investor and you want to dip your toe in the water and actually have a go at PtPL. Please note that this post relates specifically to the UK market but the principles are equally applicable to other countries.
My advice is start with Ratesetter (relatively safe but uninspiring). It only takes a few minutes to sign up. It costs nothing. Invest a small amount (minimum investment is £10). You can put your cash in the 5 year market (interest around 6%) or shorter term markets where interest is less. To start, I would recommend the monthly market that currently pays 2.8%.
Beware the 5 year market as RS has relatively heavy penalties for early withdrawal. As we will see later, other sites will offer 12% or more on a 6 month loan. Many sites also have a secondary market so you can sell your loans instantly without penalty.
Sites like Ratesetter and Zopa lend to individuals rather than businesses. Defaults are generally not a problem as they have a provision funds to cover this. Hence the lower rates of interest offered.
Next, sign up with Funding Circle (FC). Funding circle is more interesting. You bid for specific loans to businesses. The down side is the risk of default – there is no provision fund but FC do provide an estimate of default rate, based on loan category (A+ through to E), based on their own historical data.
Most loans are unsecured so a default means you may lose some or all of your investment in that loan. I now only invest in secured property loans on FC and leave the unsecured loans alone. Loans secured against property mean you stand a good chance of getting all your cash back (assuming the valuation is accurate) once the property is sold.
Interest rates on FC have fallen somewhat and the chance to bid for your own rate has been removed. A+ loans pay around 6.5% (after defaults) while E loans (highest risk) pay around 9%.
Look out for Cashback on some larger A+ property loans. I recently got a tasty 2% on a 6 month loan. However, since the New Year, Cashback flow has dried up due to both a seasonal loan famine and increasing number of new borrowers hungry for fresh loans.
Unlike Ratesetter and Zopa, FC has a decent secondary market so you can normally get your cash out quickly, sometimes at a premium or, if you are desperate, at a discount.
This is where PtPL gets more interesting (and more lucrative) via platforms such as Saving Stream, Money Thing and Funding Secure. We are talking here about loans of 12-13% (with some manageable risk) for terms as short as 6 months (renewable) as well as the option to sell without loss on the secondary market. Anyway, that's enough for now. I’ll continue step 3 in my next post.
In the meantime, happy PtP Lending!