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!

UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk and Tips to Avoid Losses

Evaluating Financial Risk

Provision Funds

Platforms such as Ratesetter and Zopa include a provision fund to cover any expected defaults.  This is one reason why the rates of interest offered are relatively low.  The best interest on offer is between5% and 6% with Ratesetter if you are prepared to lend your money for 5 years.

This post will focus on platforms with no provision fund where defaults may directly affect the returns available to the lender.

Unsecured Loans

Funding Circle (FC) provide an estimate of the percentage loans expected to default, based on historical data for each class of loan.  However, their loans are typically for small businesses and the failure rate, in my experience, may be higher than the FC prediction and recovery rates are relatively small because the majority of their loans are unsecured (ie not underwritten by a tangible asset such as property or land).

Secured Loans at 12%

I now avoid unsecured loans and prefer platforms such as Saving Stream and Money Thing.  Saving Stream loans are almost exclusively secured against property and land while Money Thing has a broader mix of assets that also include artworks and portfolios of goods such as electronics or jewellery.  Surprisingly these sites both offer annual interest of around 12% with no fees charged to the lender.   

Minimising Losses

My tip to minimise losses is to spread your money across as many loans as possible.  Another tip is to further diversify by lending through several PtPL platforms.  You should also assess the risk associated with individual loans.  For example, if property is to be developed, is the business case for the loan realistic based on current market conditions?

Accuracy of Valuation

Something important to consider is the accuracy of the valuation of the asset.  Platforms usually quote the Loan To Value (of the asset), abbreviated to LTV, as a percentage.  So, for example, a loan for £100,000 secured by an asset worth £200,000 would have an LTV of 50%.  The lower the LTV the less likely you are to lose money due to a default coupled with a poor valuation. 

Beware works of art where the estimated value may be optimistic depending on the state of the market and current fashions.  In the case of a default, the actual value of the asset must cover money owed to the platform, the lenders capital and interest as well as selling costs, legal fees, transport costs etc.

Evaluating PtPL Platforms

In my next post I’ll explore how we can evaluate the risk in individual PtPL platforms and identify how likely they are to have loans that default where the capital or interest owed are not fully recovered.

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! 

How to actually DO Peer to Peer Lending – in a nutshell, PRACTICAL PtPL

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.

STEP 1 

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. 

   

STEP 2

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.  

  

STEP 3

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!  

UK Peer to Peer Lending – Is it really ‘Too Good to be True?’

Many self-proclaimed financial experts say Peer to Peer lending (PtPL) is flawed and full of risk.  Most of them are directly or indirectly employed by big banks or brokers and have an interest in maintaining the financial status quo.  But then this is no different to the doom-mongers who have been predicting a stock market crash every month since the great depression!

Here are some classic arguments:

     No Government Protection

The UK Government underwrites approved bank and building society SAVINGS via the Financial Services Compensation Scheme (FSCS).  This scheme clearly doesn’t extend to anything with risk whether stocks, shares, funds or peer to peer loans.

However, this doesn’t mean that government doesn’t like PtPL.  The Government regularly invests 10% in loans to small/medium UK businesses through platforms such as Funding Circle.  

The UK Government is also encouraging PtPL via it’s new third ISA, known as the Innovative Finance ISA.  There may be no government protection for PtPL but equally there has never been any state compensation for losses in any global stock market.

 Too Risky

Risk is relative.  Buying shares or funds is very risky.  I have a pharma fund that gained well over 10% in less than a year but where am I now? – a loss of around 10%! 

The risks in PtPL are much easier to quantify and you can also build a mixed portfolio to cover many of the risks.  So, for example, on each platform, you should spread your cash across a relatively large number of loans.  If the platform offers loans secured against a range of assets then mix the assets.  For example, with a platform like Money Thing you can spread the risk between several asset classes including fine art, railway memorabilia, land, property or super cars. 

In practice, while stocks and shares jump around in an almost totally unpredictable manner, PtP loans result in a fairly steady and predictable stream of interest. This makes PtPL an ideal regular income source.

     The Platform Might Fail

Do your own ‘due diligence’.  Check out the company, the backers and what other users think (Why not join the PtP Independent Forum?).  Examine the platform’s loan supply and their track record in terms of both defaults and recoveries.

 Too Many Defaults

Lower interest sites like ZOPA or Ratesetter (typically 5-6% over 5 years) have provision funds to cover defaults.  Other platforms such as Funding Circle (FC) have a projection for defaults that you can include in your own calculations. 

For example , the safest FC risk category is A+.  This typically pays around 8% interest.  FC charge a fee of 1% and estimate a 0.6% loss due to defaults.  The actual net projected interest in this example is therefore  6.4%.

Other sites, such as Saving Stream, Money Thing, Funding Secure and Assetz only offer secured loans against assets such as property.  This means that, provided the valuation is correct, you should eventually get all your money back, in the case of a default, once the asset is sold.  You can also check the platform track record in terms of defaults to estimate the risks.

A Final thought

 You don’t need to be a financial expert to do Peer to Peer Lending.  What you do need is some common sense and you should make sure that you never invest money you can’t afford to lose.  If I invest say £50,000 in PtP then I clearly need to make sure that I don’t put £25,000 on a single loan!  Ideally I should spread my investment across several platforms and make sure a good proportion of the total is invested at relatively low risk.

Yes Peer to Peer lending may, at first sight, seem too good to be true but my advice is to give it a try and see how it works out for you by taking out some trial small loans.  You might be pleasantly surprised.  

I would suggest PtPL is far less risky than the stock market and far more rewarding than a savings account, even without the government protection!

UK Peer to Peer Lending - Innovative Finance ISAs (IFISA) and the way ahead

'IFFY' ISAs?

Some cynics are nicknaming the proposed government IFISA’s as ‘iffy’ ISAs and, considering that these products are due to launch by 6 April 2016 (only 3 months away), surprisingly little is yet known about them.

The creation of Innovative Finance ISAs is all part of the UK government’s enthusiasm for alternative finance in general and in particular, Peer to Peer Lending.  This is surprising as it often seems the Conservatives (the clue is in the name) favour the wealthy, big banks and other traditional fat-cat financial institutions.  

However, George Osborne has been a champion of peer to peer lending for some time (reflected in his budget statements) with the government lending up to 10% of the cash for selected small businesses loans through platforms such as Funding Circle.

The IFISA may also eventually include other alternative finance platforms such as crowd funding but it is assumed by many that this will come later once the PtPL option has been added to ISAs.

Meanwhile the big banks as well as big brokers such as H&L have, until recently, shown little enthusiasm for Peer to Peer Lending (PtPL).  (Do a search on their websites to see what I mean.)

'Boy' George Osborne Loves PtPLending?

What do we know?

So what do we know about the IFISA?  Currently you can invest up to £15240 maximum (tax free) in a cash ISA and/or stocks and shares ISA.  Unfortunately both have their problems.  Cash ISAs pay almost zero interest and shares are more likely to go down rather than up in the current financial climate.  In April 2016, The IFISA will offer a third alternative allowing the allowance to be used on PtPL.

What DON'T we know?

So what DON’T we know?  Well, quite a lot!  Apparently the government have not yet finalised the rules for IFISAs, even though their introduction is only months away!

We know that the major players such as Zopa, Ratesetter and Funding circle hope to have their own IFISA wrapper.  It also seems likely that other platforms such as Assetz  Capital and Saving Stream will also move towards the ISA provision.   We also know brokers like H&L also plan to have a wrapper.  It is not clear yet what platforms or products H&L will put in the wrapper and also how much they will charge for this service.

The general consensus from the informed lenders (the Independent Peer to Peer Lending Forum) is that the interest available from the IFISA will be less than that available on the non-ISA product.  If, for the sake of argument, an IFISA offered 5% or less interest, then more experienced PtP lender might well opt for a straight platform loan with, for example, Saving Stream (12% interest with asset security) and then pay any tax owed.

Other common PtPL questions include: 

Will the new IFISA allowance be limited to just one PtPL platform or broker in a year?

Can existing lenders transfer existing PtP loans into an IFISA wrapper?

Watch this space for further ‘iffy’ ISA developments – Anyway, all these unknowns do make me wonder just how many of these IFISA products will actually be available to tax payers in April 2016!     

My UK Peer to Peer Lending Journey so far..

It’s Christmas Eve so I thought I’d do a quick update on which platforms my Peer to Peer Lending money currently resides.

Platform Pie Chart Based on Investment

About a year ago, over 50% of my money was in the Ratesetter 5 year market.  I’m now pulling my money out as quickly as I can simply because the interest is relatively low (around 6%).  Unfortunately, Ratesetter have penalties for early withdrawal and no secondary market.

The Funding Circle (FC) proportion has also reduced because they have switched to fixed interest rates so you can no longer bid for a variable rate.  Generally the return on Funding Circle is now around 7% to 8%.  Another disadvantage of FC is that loans are unsecured and any defaults lower the actual return.

So which platforms have I increased my proportional share?  Well, there are three platforms that I now favour and they are all asset-based.  These are Money Thing, Funding Secure and Saving Stream.  Asset-based means the loan is secured against the asset.  The usual asset is property or land but can also be works of art, jewellery, super cars, boats, industrial machinery and shipping containers.

Saving Stream

Saving Stream is currently my number 1 choice with great track record (no losses so far) and typically one year loans at an interest of 12% with zero fees.

Saving Stream are continually refine their offering and are the only platform to offer Pre-Funding.  This allows the lender to specify how much they wish to lend on future ‘pipeline’ loans.  In other words you can bid or buy on the secondary market without the need to pay money into the platform up front.  However, once transactions are completed you are asked to settle up within 24 hours.

Anyway, here is wishing you all a very happy and peaceful Christmas and a prosperous New Year.  

Finally, if you haven't tried it, then why not consider including Peer to Peer Lending in your 2016 portfolio?   Trust me, Peer to Peer Lending is a great way to improve your financial prospects!  

  

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.     

Assetz Capital Peer to Peer Lending - New Account Offers Instant Access Savings at 7% !

Introducing the Assetz Great British Business Account (GBBA)

Too good to be true?  Read on ..

Assetz Capital have just introduced a THIRD Peer to Peer Lending Account.  Until recently, they had:

• A Manual Loan Investment Account where you build your own portfolio of loans
• A Green Energy Income Account that pays 7% 

The Manual Account typically pays around 11% on average with a package of self-selected secured (against property) loans.  There is no protection fund.  The Green Account automatically selects green loans (wind turbines, solar etc.) for you making a balanced, protected, portfolio at a fixed interest of 7%.

The good news with the Green Fund is it is highly liquid.  In other words you can (normally) get most of your money out very quickly.

Ratesetter Comparison 

This compares very favourably with, for example, Ratesetter, where you currently get 5.9% in the 5 year market.  This is decidedly NOT liquid in that it takes 5 YEARS to get all your money back and there are heavy penalties for early withdrawal.

The GBBA

So what about the third account, the GBBA?  This is similar in operation to the Green Account but this one offers 7% based on loans to Small to Medium British Enterprises (SME).  Like the Green Account it is protected by a contingency fund.

Some Assetz customers have been cautious about the future of Green Investment so this new fund offers a great alternative to park some cash temporarily and still get a really good rate of interest without too much risk.

Note that the Manual account includes all the Assetz P2P loans while the Green and Business Accounts each include a relevant subset of these according to the fund type (Green or Small Business).

'Hands On' verses 'Leave Alone'

While the Manual account is fairly 'hands on' and involves moderate risk, the Green and Business accounts are much safer and require virtually no management.  In other words, You deposit some cash in your Assetz account then transfer it into the GBBA.  When you want the money back you withdraw it from the GBBA and hopefully it will quickly appear in your cash account where you can transfer it back to your current account.  Tres simple!

Warning

Please note that I have no particular preference for Assetz Capital but, as other Assetz lenders have done, I have purchased a few shares in the company.  So please don't take this as a recommendation.  Make up your own mind as to whether this is a good deal for you and beware of investing too much in any single Peer to Peer platform.

As with all investing, DIVERSIFICATION is key.  Happy Lending!

The Peer to Peer Lending Lifecycle - Where am I today?

I’ve now informally reviewed eight UK P2PL platforms that I have personal experience of so I thought it might be useful to let you know how I am doing.  My goal here is to give you a simple overview and avoid too much jargon or technical stuff.  If you check the archive you can find my posts on the various platforms.

The Beginning

I guess most people begin their P2P journey on a simple platform like Ratesetter or Zopa where you decide how much you want to invest and for how long.  RS and Zopa spread the risk for you.  These platforms are largely hands free (more like investing in a shares or funds).  The borrowers are private individuals rather than businesses.

The Next Step

The next step I made was to try Funding Circle.  This platform is more complex and allows the lender to bid in an auction for individual unsecured business loans.  By bidding, you decide what interest rate you require.  If you get this right you will end up with a high interest rate while other lenders for the same loan get a lower rate.

For example, lets assume the borrower’s target interest rate for a loan is 10%.  In practice some lenders may have bid 7% while others may bid 14%.  The rate of 10% is an average of all the offers from the pool of lenders.  The highest rate bids are eliminated as lower rate bids pile into the auction so the trick is to be ready to lower your rate during the auction but not to go lower than your own target.  It’s a bit like an Ebay auction but more complicated because there are lots of winners (but some win more than others, if you get my drift!).

Risks

As you can see, Funding Circle requires a fair bit of micro-management and is more suitable for those with some spare time.  Another issue with Funding Circle is the word ‘unsecured loan’.  A proportion of loans will go into default and recovery of debt is, at best, relatively low (partly because there is no asset the loan is secured against).  With Funding Circle, the lender takes on the risk of defaults because there is no contingency fund.

The Numbers

Let me put some figures to all this.  About 50% of my Peer to Peer pot is currently in Ratesetter where I am earning around 5.9%.  This is reasonably protected from any bad debt.   25% of my money is in Funding Circle where I am currently earning 7.9%.  This was 8.3% until recently, when two more loans defaulted.  Funding Circle estimate, based on their statistics, I should be earning 8.7%.  I‘ve actually lost £450 with (so far) only £36 recovered.  I should add my loans are highly diversified and I now never put more than £60 into an individual loan.

Onwards and Upwards with Asset-based Loans?

Where is the other 25% of my lending?  Well, I'm gradually (and cautiously!) moving more money into five of the newer, asset-secured platforms:

• Ablrate
• Assetz Capital 
• Funding Secure 
• Money Thing  
• Saving Stream  

These pay between 10 and 14% (with no fees) with the loan being secured against property, land or other tangible assets.  The pie chart illustrates the current state of my investments. With these platforms, a reasonable amount of micro-management is required as you need to select each loan and each platform is different in the way it works.

Generally there are not enough loans available on these platforms to satisfy the demand so you need to bid for new loans as soon as they appear.  Interest rates are fixed, so the auction is much simpler than Funding Circle, you simple decide how much you want to bid for.  Note some sites have a secondary market where you can buy existing loans but, in practice, these offers are like fireflies, they disappear in the blink of an eye!

Incidentally, If you Google (or Bing) 'UK Asset based Peer to Peer Lending', you won’t find much impartial information.  Wiki is sadly lacking in information about UK Asset-based lending; which is one reason why I started this blog.  So more on Asset-based P2P lending in future posts!

Funding Secure - Yet another UK asset-based Peer to Peer Lending Platform

I’ve recently introduced you to two asset based platforms; Saving Stream (SS) and Money Thing (MT).  They both have a fixed interest rate of 12% and are somewhat similar in the way they work.

Saving Stream

SS normally lends for a term of one year but also has a secondary market that allows you (currently) to sell your loans easily at any time because there are not enough loans/value to satisfy the demand. Note that this situation could easily change.  SS loans are usually secured against property (bricks and mortar).

Money Thing

In contrast, Money Thing is a 6 month term with no secondary market.  Loans are typically secured against objects (or bundles of objects).  There is the hint of the pawnbroker here; think, artworks, cars and jewellery as well as the odd plane.

Funding Secure 

“Yes, but what about FUNDING SECURE?”  I hear you cry.  Well it’s sort of a cross between SS and MT.  Interests rates are normally 12 or 13% with a 6 month term, no secondary market and a mix of security against objects or land/property.  More accurately, Funding Secure (FS) appear to have started out with the pawnbroker model but are increasingly moving into land and bricks.

I’m currently investing modest amounts in the three platforms to see how I get on.  So far all three are fine and hopefully, with the relatively short terms, there won’t be too many defaults.  

The minimum investment in an FS loan is a mere £25 so you don’t have to gamble your life savings to give it a go.  Transfers from a current account (assuming a rapid transfer) become active on the site within 30min.

Better be Quick!

However, The problem with these platforms is you need to be quick.  Once a new loan appears, unless it is a biggy (£100K +) then a frenzied mob gobbles it up before your eyes (On FS, once the loan is live, you can see the amount left diminish before your eyes).

Do be aware that these platforms are all risky and I fear that in 6 months time I may be warning you to put all your money in Ratesetter or Zopa (with a much lower interest rate).

Fine Wines?

Incidentally I see the next FS loan is ‘Fine wines’ – a massive loan of £500 (asset value £800).  I’ll drink to that one! (But what if it’s ‘corked’?  That's one thing the valuation expert can’t check!)

Peer to Peer Lending - Ratesetter and getting your Money Back!

This is a big issue for those of us ‘PRENDERS’ who started stashing lots of money in platforms like Ratesetter and Funding Circle but who now want to shift some of it into higher interest sites such as Saving Stream, Funding Secure or Money Thing.  The technical term for this issue is LIQUIDITY (how easy is it to cash in your investment?).

Ratesetter Sellout?

About a year ago I put around 50% of my PtPL money into the Ratesetter 5 year market at around 6.0%. I’ve now turned off further investment so my Holding Account receives a few hundred pounds a month that I can reinvest elsewhere.  In practice ‘Sellout’, the Ratesetter term for cashing all or part of your investment early, carries too heavy a penalty to make it worthwhile to cash in, except in an extreme emergency.

Secondary Markets    

However, Funding Circle has a Secondary Market so you can offer some of your loans for sale, at any time, at a premium (or discount) according how attractive the rates are.

It is really ‘Horses for Courses’.  Ratesetter is relatively safe but paying the rate for a five year loan means five years or a penalty.

With Funding Circle you bid for the rate and can then sell your loans at any time.  However your 5 year rate on Ratesetter is protected while on Funding circle the final interest rate you achieve depends on how many defaults you have and how much cash is subsequently recovered.

Liquidity in Asset-based high interest platforms

If you put money into some of the high interest platforms like Saving Stream, or Money Thing (both pay 12%), the terms are short, typically 6 – 12 months, and there is also secondary market making them relatively ‘liquid’.  Of course, these newer platforms also carry greater risk in spite of being secured against assets.  Currently it is very easy to sell loans but hard to buy.  Future events could easily change that.

‘What happens in a future financial crisis?’

Clearly you then have a much better chance of eventually getting your money back from Ratesetter than some of the other platforms.

Solution?

The sensible solution appears to be a portfolio of platforms/loans with the most money in platforms like Ratesetter/Funding Circle and a smaller amount invested in a basket of high interest platforms (if you want some excitement!)

Advice for Peer to Peer Lending beginners wanting to ‘take the plunge’

Question: 'I’m a PRENDING novice living in the UK – So where should I start with this Peer to Peer Lending thing?'

Well, Ratesetter is a great place to start because it gives a reasonable return, has a large volume of loans and avoids the complexities of having to bid for individual loans.  It is also is relatively risk free and has a good track record.  Here are the steps to get started:

1. Join Ratesetter.  It costs nothing and it only takes a few minutes to register online.
2. Once you have an account you can transfer your initial investment to the site from your bank account.  I suggest something like £100 to test the water.  
3. You now need to select a Term (length) for the loan and the interest rate you require.

Interest rates

Here are the terms and the corresponding ‘Market Rate’ interest rates yesterday (13 June 2015):

• 1 month:        2.6%
• 1 year:           3.1%
• 3 year:           4.1%
• 5 year:           5.6%

Note that these rates are currently low; my average five year rate is around 6.0% and the 5 year rate has gone as high as around 6.7% in the recent past.  Low rates suggest more people are lending, perhaps due to the Greek Crisis and the stock market turmoil?

Market Rate

Having selected the term of the loan, if you bid the market rate then your money will be invested fairly quickly, typically within 24 hours.  If you specify a higher rate then it is likely to take much longer for your money to be invested and the exact time will depend how the market moves.

That’s really all there is to it.  You can either arrange to automatically reinvest the returned payments from the lender, so increasing your investment over time or allow returned capital and/or interest to be transferred to your Ratesetter ‘holding’ account.

This is all very well, but supposing I need the money invested in the 5 year market back in a hurry?

Rapid Cash Withdrawal (liquidity)

With Ratesetter you can access your money on loan at short notice using the ‘Sellout’ function. Sellout will allow you to sell your contracts (loans) provided there is a new lender available to match your existing loans.   I’ve never used Sellout and am content to withdraw my capital and interest as it becomes available to invest at higher rates elsewhere.

Alternative to Ratesetter

An alternative, if you feel the Ratesetter market rate is too low, is to invest in the Assetz Capital Green Energy Income Fund that returns 7% and you can normally withdraw your funds very quickly.  This is mentioned in more detail in another post:  Assetz Capital Green Energy Income Fund

Higher Rates

Of course, once you've you are familiar with Peer to Peer Lending, you can earn far higher rates on sites such as Saving Stream or Money Thing.  I'll be covering these platforms in future posts.

Until then, happy lending!

Rik’s Peer to Peer Journey and an Introduction to the Peer to Peer Independent Forum

In my last post I promised to introduce asset-based loan platforms such as Assetz Capital and Saving Stream.  Before I do that, it might be helpful for me to share my own Peer to Peer Lending (prending) Journey.  I began lending around 18 months ago when I decided to ‘retire’.

Incidentally, I hate the ‘R’ word – I like to think of so called retirement as simply a choice to quit full time employment in order to be free to do what I want.  The word Retirement has that retro feel of carpet slippers, cocoa and an engraved clock from the last employer on the mantelpiece!

Stock Market vs Peer to Peer?

My wife and I have ended up with a survivable pension income together with two other pension pots transferred into a SIPP invested in various funds.  I also took the maximum tax free payments (25%) from the other pensions, some of which I have invested in the stock market and the rest in Peer to Peer Lending.  Currently 70% of my cash is in Funds linked to the stock market and 30% in PtPL.

Based on how both have performed so far, I hope to increase the PtPL share to at least 50% in the next 12 months.  With Peer to Peer, there is a steady stream of interest while the value of stock market funds flap around like a line of washing in a hurricane!

Testing the Water

I began with ZOPA, Ratesetter and Funding Circle and put small amounts in each in order to test the water.  Interest was relatively low with Zopa so I stopped investing at £3k and am continuing to withdraw returned capital and interest.  I put a significant amount in Ratesetter and Funding circle and these two platforms are still where the majority of my PtP cash is invested (80%) with the other 20% in Asset based platforms.

I’m continuing to switch returned cash from Ratesetter (current interest 6%) and Funding Circle (interest currently 8.3%) into other, higher paying platforms but I’m cautious about doing this too quickly as most of these platforms are relatively new and untried.

My first port of call, for higher interest rates was Assetz Capital.  Here, I built up my investment to around £3k with an average interest rate of 11%.  I will share more about Assetz in my next post.

Peer to Peer Independent Forum

Finally, I’d like to finish with a plug for the Peer to Peer Independent Forum.  While not a beginner’s guide, this is a great place to gather opinions from both UK Lenders and those who actually work for, or own, the individual UK based platforms.  Some of the discussions are quite technical but the forum will give you an honest feel for how fellow ‘prenders’ rate the different platforms.

More on Funding Circle

Funding Circle is my second favourite platform in terms of amount invested.  I am, in practice, currently getting around 8.3% on my investment while the projected amount based on expected FC default statistics, is 8.7%.  Note that interest rates on the site have since fallen so if I were creating a portfolio from scratch today the rate I would get would probably be lower.  Funding Circle loan terms are generally either 3 or 5 years in length although some loans are for one year or less.

Risks

Funding Circle takes up more time than the simpler sites like Ratesetter but offers more entertainment (depending on your enjoyment of online auctions) and higher returns.  While some of the loans have a guarantor, these are unsecured loans, ie not secured against a tangible asset such as property, so there is a small but real danger of losing both capital and interest.  My current personal losses are around 2.7% of the amount invested.   This will reduce if more money is recovered but also increase if there are more defaults.

Auto Bid

If you don’t like or don’t have time for real-time auctions during the working day (some employers may frown upon using you workstation for this purpose) then Autobid is for you.  This enables you to program the FC platform to select suitable loans for you and bid on your behalf.  There are obvious disadvantages to autobid, however.

• You don’t get a chance to hand pick the loans
• You don’t know how the auction will go so you have to set the bid interest rate lower in order to stand a fair chance of winning
• It will take longer to get your money invested

Secondary Market

The second alternative to live auctions is the Funding Circle Secondary Market.  This is particularly useful when you start out and want to build a portfolio of loans fairly quickly.  This allows lenders to put their loan parts for sale and other lenders to buy them.
This is a win-win for both buyers and sellers.  It introduces liquidity into the market allowing lenders to access their cash before the loan completes and for other lenders to increase their portfolio without having to bid.

Greece and China

It is times like this, with the stock markets worldwide tumbling because of Greek Exit fears and the Chinese markets in free fall, that I’m glad I invested significantly in Peer to Peer.  My only regret is that I still have so much cash in a Self Invested Personal Pension (SIPP) invested in stock market funds.  Sure, now may not be a particularly good time to sell but, if and when the stock market improves, then it might be prudent to shift more cash away from the markets and invest in Peer to Peer.  I’m so thankful that extracting cash from a SIPP is much easier than it used to be!

Good luck with Funding Circle.  In my next post I shall introduce you to some platforms that provide asset based loans.  Should the loan default then it is secured against an asset such as property or even a plane or a work of art!  

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).

How to get started with Peer to Peer Lending

I started my Peer to Peer Lending (Prending) journey with ZOPA and Ratesetter around 18 months ago – both platforms are relatively easy to understand.  Zopa currently pays 5% on the 5 year market (ie the loan is for 5 years).

Ratesetter allows you to bid for the rate you want.  The Ratesetter 5 year market rate is typically 5.5% to 6.5% per annum.  Rates will be lower if you choose a shorter loan period.  The current Ratesetter one month rate is 2.7% per annum (but still much better than any bank!).  Please note that the higher the rate you bid for, the longer you will have to wait for your money to be invested.

Hyperlinks

Note that the links above for ZOPA and Ratesetter are both promotional links.  If you click on one of them and join the platform and then subsequently lend £1000, you (and I) will currently each receive a gift of £25.  However, these sites are easy to locate via Google if you don't fancy the £25!

How do these platforms work?

Both sites allow you to choose how much to invest.  The minimum loan size on both sites is £20 so there is virtually nothing to lose in giving them a punt.  The borrowers on these sites are generally private individuals and your money will be shared out across a number of loans in order to spread the risk.

However, both sites have a contingency fund that should cover the costs of any defaults so the rate on offer is what you should actually get.  Both sites are pretty ‘hands off’ and you can check online at any time to see how your lending is going.

The loans on these platforms are in the form of Amortised Loans .  This means the borrower makes equal payments throughout the lifetime of the loan.  In practice this means the interest owed is returned each month together with a proportion of the capital. 

Let us assume that you made a single loan of say £1000 at 5% over a period of one year.  Half way through the loan, around half of your money would have been returned to your holding account.  This means the amount of interest being earned is continually reducing.  Only the money on loan is actually earning interest.

If you want to earn the full 5% then you need to constantly reinvest the money returned.   Fortunately these sites allow you to automatically reinvest returns although you can switch this off and ‘hold’ returned capital and/or interest.

Liquidity

This relative ease of access to your money is known as liquidity.  Assets that can be easily bought or sold are known as liquid assets.

With sites like Zopa and Ratesetter, if you need some of your money back then you can switch off the auto-invest facility and transfer the resulting cash in your holding account to your bank current account.

I will return to the subject of liquidity and accessing your lent money again as we look at other more complicated platforms and how they handle different types of loan such as interest only loans.

What next? 

My advice is if you are still interested, then why not get your feet wet and try one of these sites?  It only takes a few minutes to sign up and then transfer a small amount of money onto the platform (typically via a bank card or bank transfer).

Note: that although these sites are pretty safe and are regulated by the Government, your money is not yet covered by the Government’s Financial Services Compensation Scheme (FSCS).  This currently pays up to £85,000 should your bank fold with the result that your savings are lost. 

However the Government does lend to small business using peer to peer platforms and the Chancellor is supporting PtPL by, for example, allowing them to be included in Self Invested Personal Pensions (SIPPs).