UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk by Assessing Platform Health

In my previous post, I outlined some of the factors leading to PtPL losses.  In this post I’ll look specifically at the risks associated with individual PtP platforms.  By the way, don’t believe the likes of Lord Adair Turner with his ‘Peer to Peer is Doomed’ nonsense.  Lord Turner has significant interest in a traditional business loans company hence his (biased) condemnation of Peer to Peer Lending!

I’ll ignore the big three; Zopa, Ratesetter and Funding Circle as their returns are relatively low (typically 4% - 7%) and the first two have provision funds to (hopefully) cover any losses.  The sites I favour pay 12% or more but with this comes obvious increased risk.  Typical examples are Saving Stream, Funding Secure and Money Thing. 

These platforms offer all their loans secured against material assets such as land, property, cars, boats, planes and works of art.  Incidentally, this is a much better deal than Funding Circle, where most of the loans are unsecured and the buyer must therefore factor in defaults with limited or no recovery of capital or remaining interest.

Here are two key ways to evaluate these platforms:

Number ONE:  Look at the state of the Secondary Market

These three platforms each have a secondary market where you can buy and sell loans held by other people rather than buying new loans.  But why would you want to do that, I hear you ask?  Well, you may wish to buy additional loans in order to diversify, ie spread your cash across more loans rather than waiting for new loans to appear.  Alternatively you may want to suddenly withdraw some cash rather than waiting until the end of a loan.

So what to look for?  After Christmas 2015 there was a UK PtP loan famine.  In other words there was nothing available on the secondary markets.  This is good news if you are selling loans but frustrating if you want to buy.  Now (late March) there is something of a glut.  The three platforms I mentioned all have loans to buy on the secondary market. 

What to look out for is platforms with too much on offer on the secondary market  or worse still new loans that are not fully funded.  If the platform offers the ability for sellers to off load unwanted loans at a discount, then are there a lot loans offered at a discount that are still not selling?  This may suggest that lenders are keen to offload existing loans even at a loss.  You then need to find out why they may be unhappy with the platform.  This brings me neatly to the second point.

Number TWO: Read the PtP Independent Forum 

The forum is UK-based but is also frequented by lenders in mainland Europe.   The financial expertise on this forum is amazing.  Find out what experienced lenders think of each platform and the quality of loans being offered.  Do others share your concern about a particular platform?  Use the forum to find out the default record of individual platforms and how often the capital and unpaid interest were eventually recovered.

Finally, as long as you keep well informed and don’t lend what you can’t afford to loose, I think you'll find PtPL is a much safer bet than playing the stock market roulette!

How to DO Peer to Peer Lending (PtPL) – Part 2

Practical Peer to Peer lending Advice

In my previous post  I gave tips on how to try PtPL with minimum risk.  I covered platforms such as Ratesetter (RS) and Funding Circle (FC).  In this post I shall look at Asset-based Lending on platforms such as Saving Stream (SS), Money Thing (MT) and Funding Secure (FS).  These offer far higher rates of interest with some (manageable) risk as well as making it relatively easy to get your capital back quickly via a Secondary Market.

These 3 asset-based PtPL sites reduce risk by securing each loan against a tangible asset such as property, art works, land, cars, planes or industrial machinery.  In the event of a default, the asset can be sold by the platform and the proceeds used to pay back the lenders.  The main risks are therefore platform failure or the asset valuation being too low.

These sites typically offer shorter loan terms than sites like Ratesetter.  Ratesetter’s best rate is over a term of 5 years and pays typically 5-6%. 

Saving Stream pays 12% for a bridging loan of typically 12 months.  In practice these loans may be redeemed earlier or continue for longer depending on progress of the development work required before the land or property is sold. 

In the current market, you can immediately sell loans without loss on the Saving Stream secondary market.  It is also worth noting that SS, MT and FS don’t charge any fees to lenders for buying or selling loans. 

While Saving Stream originally lent against boats, they now specialise in property and land.  Money Thing and Funding Secure offer a wider range of assets including cars and artworks.  More specialised sites, such as Ablrate, lend against aircraft, industrial plant and shipping containers with rates from around 10-14%.

It is obviously wise to spread your money across loans, asset types and platforms.  This minimises the risk of asset value collapse, platform failure or individual loan defaults.

Secondary markets are a useful means of further diversification for your existing loans and a channel to reinvest returned interest and capital on shorter term loans.

If you work full time then be aware that sites like Zopa and Ratesetter are relatively ‘hands off’ while the asset-based sites require more ‘hands on’ management.  You may also wish to look at the details of the individual asset-based loans, for example valuation reports, to make sure you are comfortable with the stated purpose of the loan.

So, finally, do give PtPL a shot.  Start with small amounts across several platforms and see how you get on.  But remember, don’t ever invest more than you can afford to lose.  Having said that, I think that you’ll find that PtPL is much less of a lottery than the stock market! 

Saving Stream: Steadily Increasing the Flow of Peer to Peer UK Property Loans!

Full Flood?

In my opinion, Saving Stream, incidentally my favourite PtP platform in the UK, is now more than a stream and is rapidly becoming a river in full flood of substantial, i.e. multi-million pound, UK property loans.

Although a relatively ‘new kid on the block’ in terms of Peer to Peer Lenders, Saving Stream is growing rapidly  and have recently moved into new premises in Southsea.

Saving stream loans are all asset-based, return 12% per annum (plus no fees) and are secured against property associated with the loan.  These bridging loans normally last for about 12 months.  Secured loans mean that, in the event of a default, there is a reasonable probability of getting the capital back once the associated property has been sold off. 

Secondary Market

Saving Stream also have a simple secondary market allowing loans to be sold at any time to other members on the platform.  This is great for those wishing to exit a loan early and also for those who wish to diversify, reducing their exposure from a single, larger loan to a number of smaller ones.

Note that the secondary market only operates at par.  This means there is no opportunity to sell at a premium or discount.  I like this approach and the simplicity of the SS secondary market.

Pre-Funding

The other fantastic thing about the Saving Stream platform is Pre-Funding.  Every other UK PtP platform informs you when a loan is expected to come on-line and then requires you to add sufficient funds to your account before you bid.  Often bidders fail to get anything because the ‘big players’ grab the lot in the first few seconds.  The unsuccessful bidder then has to decide whether to leave their cash on the platform (earning no interest) until the next loan or whether to withdraw the cash again. 

Pre-funding allows the bidder to define how much of each pipeline loan (ie those not yet ‘live’) that they wish to purchase.  At this point the lender doesn't pay anything.  Once the loan is ready to go live, saving stream email you to let you know what proportion of your bid has actually been allocated to you.  So, for example, if I bid for £1000 of a £1M loan and the total pre-funding bids are £2M then I only get half what I bid, i.e. £500.

Settling Up

At this point you can sell part of the new loan, if you have been allocated too much, and/or buy or sell parts of other loans on the secondary market.  Once this activity is complete the platform indicates exactly what you owe and SS ask you to settle up, ideally within 24 hours.

Generally, when a large, multimillion £ pound loan comes on stream, the secondary market opens up temporarily as lenders release older loans in order to fund the newer ones.  This is the time to diversify.  Normally the demand for a share in new or old loans outstrips supply so, on the Saving Stream platform, selling a loan is almost instantaneous where as it takes patience to successfully buy an existing loan. 

What Next?

What next for Saving Stream?  Well, I for one, hope they can continue to delight their rapidly expanding  Peer to Peer Lending audience in 2016.  This means they continue their excellent record of negotiating and managing new and existing loans so any future defaults result in no permanent losses for their lenders.

Kangaroo Steaks and Funding Circle

With the platforms mentioned in my last post, Ratesetter and Zopa, the websites sort out the borrowers to match the sum you wish to invest. Should a borrower default on a loan then either the Zopa Safeguard Fund or the Ratesetter Provision Fund should ensure you, the lender, aren't out of pocket. This is one of the reasons the lender interest rates are lower on these simpler platforms than sites offering both more decision making and more potential risk.

Here is a simplified breakdown of current UK Peer to Peer lending platforms:

• Simple:                                For example, Ratesetter/Zopa
• Intermediate:                      For example, Funding Circle
• Complex, Asset-based:     For example, Assetz, Savings Stream or Money Thing

Kangaroo

Before I introduce you to Funding Circle, 'what about the Kangaroo?', I hear you ask.  One of my many new distractions, since retreating from full-time employment, is cooking. Last night I cooked kangaroo steaks (from Lidl, always a store with surprising tucker.). Fortunately the Internet provides loads of recipes and advice for cooking just about anything. Anyway, the result was unexpectedly superb (even if I do say it myself) and delighted Mrs Ravado (who, until recently was the only cook left in our household).

Roo is an extremely low-fat meat so it’s easy to overcook and dry out. My meat, cut into strips, served over a bed of mash potato, topped with a red current sauce/red wine sauce, was rare in the middle and medium on the outside. Perfection!

Incidentally, cooking is a lot like the current Peer to Peer scene in the UK; lots of ingredients and dishes and loads of opportunities to try new things and enjoy creating unexpectedly satisfying dishes (or, in the PtPL case, a healthy cash return!).

Funding Circle

Enough culinary boasting. Let’s return to PtPL. Funding Circle lends to small businesses rather than individual borrowers. Each borrower is fully identified and there is information about their business plan, history and what the loan is for. The lenders can select loans to bid for and decide how much to bid and what interest rate to offer. This creates an online auction not unlike Ebay.

As the bidding proceeds, the highest interest rate bids are eliminated so at the end of the auction the borrower hopefully gets a rate that meets their expectation. If the overall interest rate is too high then the borrower can reject the loan.

In this model, the risk lies with the lender. Loans are banded from A+ (low risk) to E (High risk) and each band has an expected failure rate. So, for example, an A+ loan for which I bid 10.6% carries a statistical risk of failure of 0.6% (plus a lending fee of 1%) so my actual return, statistically is 9%.

Diversify

The key thing with FC is to diversify. In other words, spread your cash across many borrowers. People who complain of unexpectedly large losses on FC have usually failed to spread the risk. On this platform, you need to take responsibility for risk. Funding Circle recommends that ideally each loan bid should be 1% or less of your total platform lending. So if I lend £2000 then I should ideally put only £20 on each loan (1% of total invested).

Hopefully that’s enough info to wet your appetite regarding Funding Circle. Each of these platforms provide a good summary of how they work so the best thing to do is tuck in, ie create a free account and make a £20 bid and see how you get on.

In my next post I’ll give you some more information on Funding Circle and introduce the idea of the Secondary Market (one alternative to auctions).