Traditional Savings Options with next to no interest or UK Peer to Peer Lending with Realistic Returns?

Are you a just a ‘Sun Lounger Saver’ ? – or is Peer to Peer Lending and 'mixing in with the locals' your holiday habit?

Sun Lounger for Traditional Savers?

You probably wonder what on Earth I'm on about but please hear me out.  We recently took a holiday in Barbados and I noticed that most people in the hotel made a bee-line for the sun loungers and only ever left them to grab food or a drink (leaving the obligatory, illegal towel behind to reserve their space in the sun).  You’d find few guests ever venturing into the lovely pools and even less risking the delightfully warm ocean or exploring the idyllic, tropical beach.

Traditional Savers

Traditional savers have the same fixed ideas, such as investing in cash ISAs, but never think to explore the ‘loans’ beach yet alone the whole ‘lending’ island.  The peer to peer market in the UK is teeming with a rich variety of platforms offering lots of different angles on the Peer to Peer model.

Peer to Peer Lending  

You can play pretty safe and get interest rates of around 6% but you can also lend against a whole smorgasbord of assets and get interest rates of between 7% to 14% secured against land, property, words of art, cars planes, industrial plants or shipping containers.  Assessing the risks involved is all part of the fun.

Monkeying Around!

I’m a massive fan of UK Peer to Peer Lending and currently invest with around 10 platforms.  This is reflected in the fact that in Barbados my wife and I spend much of our time wandering along the beaches and boardwalks or catching local ‘reggae’ buses ($3 (60p) to anywhere on the Island).

Green Monkeys in Welchman Hall Gulley, Barbados

We saw lots of wildlife including loads of green monkeys and a recently hatched baby turtle heading for the ocean and successfully swimming out to sea against the crashing waves.  For me that beats lying on a lounger, getting drunk in the hotel bar or investing in a cash ISA!  

Asset Backed Peer to Peer Lending - the Better Solution?

In simple terms there are two approaches to PtPL platforms.  The first is to offer minimum risk and simplicity of operation and scale it up to satisfy both institutional investors as well as a mass market.  Typical examples of these platforms, in the UK, are Zopa and Ratesetter.

These platforms typically lend to domestic borrowers with no asset security.  This means if a default occurs then a full recovery is unlikely and, at best it may take a long time to get the money invested back.  For this reason, Zopa and Ratesetter have contingency funds to protect the lender from losses, resulting in typical interest rates to the lender of between 4.5% and 6.5% over 3 to 5 years.

Saving Stream

Asset backed loans represent a much better option for the more adventurous Peer to Peer Lender.  Money is lent against a tangible asset with a verifiable value.  There are a number of specialist platforms for Asset-based loans.  Saving Stream is one of the simplest and offers 12% on every loan, with 1% being paid every month.

Saving Stream bridging loans were originally against boats but they have more recently shifted to land and property with many loans being for well over a £1M.  These typically have a term of about a year.      

LTV

One of the key parameters with an asset-based loan is the Loan to Value (LTV).  For example, if a picture valued at £1M is used to secure a loan of £500,000 then the LTV is 50%.  Assuming the valuation is accurate then this leaves plenty of cash available, should the loan default, to arrange for the sale of the item and return all the cash owing to the lenders.

Ablrate

It’s surprising what a range of assets you can lend against.  Ablrate began with loans against aircraft but have shifted towards industrial machinery such as bottling plants and shipping containers.  Their shipping container loans are currently paying 14%.  The loan funds the purchase of a number of containers and the loan is paid off once the containers are sold.  These typically run for 6 months at a time with an option to renew.

Money Thing

Two other players, Money Thing and Funding Secure originated from the pawn-broking industry.  Money Thing also offers a fixed rate of 12% across all loans.  My loans with Money Thing currently include several cars, managed portfolios of jewellery and electronics, several artworks (paintings) and finally a piece of land.  Money Thing are currently expanding into both land and property and also into the supercar market.

Funding Secure

Funding Secure also offer a mix of land, property and other assets.  Their loans are usually 12% or 13% with a renewable term of 6 months.  Other assets I’ve lent against with them include historical book collections, railway memorabilia, micro-sculptures and a replica of an 18^th century schooner!

I have to say asset-based lending is far more interesting and rewarding  and wins hands down against the more mundane Zopa model of lending money to a householders to buy second-hand car or for a bit of home improvement.           

Is Funding Circle still a Viable Platform for Peer to Peer Lending?

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.