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.           

Funding Circle to Quit Variable Rate Loans

Peer to Peer Lending remains a very volatile marketplace with constant revisions to platform function and design.  For example, Saving Stream have recently added the very useful pre-funding of loans facility so you don’t pay until AFTER the loan is allocated.

Meanwhile, Funding Circle (FC) have announced that in the next few weeks they will no longer offer Variable Rate Loans, where individual lenders can bid for their own interest rate.  FC argues that this change makes the platform easier to use for both borrowers and lenders.

No more Flipping?

However, fixed rates take away much of the enterprise of buying and selling loans on the secondary market.  The practice of ‘flipping’, where you could buy a loan at a high rate of interest and then sell it at a premium, is largely eliminated with fixed rate bidding system.

This was one of the attractions of FC, particularly to financially-savvy, entrepreneurial geeks who enjoyed gaming the platform while providing a useful service by improving liquidity via a good supply of instant loans.  

So how will the new platform look? 

Well, the new interest rates being offered appear to be lower than many existing lenders would like, although FC may either add 1% or 2% ‘Cashback’ or shift their rates upwards to fund some larger loans.

The major issue I have with FC is the number of ‘downgraded’ loans and the relatively low level of recoveries.  My effective interest rate is somewhat poorer than the FC prediction.  I’m predicted to be making 8.5% but am currently down to 7.8%.  This can obviously shift up or down depending on future failure of rates or recoveries.  Currently I’ve ‘lost’ over £500 with less than £50 being recovered.

Moving On?

The key thing is that most FC loans are not secured against assets so the chance of a full recovery of capital and interest is relatively low.  Fortunately many of my FC loans can be sold at a premium on the secondary market so I am gradually reducing my exposure the FC in favour of P2P platforms offering better interest rates, secured against material assets such as property, land or artworks.

Asset-Based Platforms

Saving Stream offers 12% across the board on property and Ablrate offer 14% on shipping containers while Funding Secure offer a range of interest rates, mainly on property with rates of typically 12-13%.  The trouble is, these asset-based loans are increasingly popular and the demand for new loans is not being fully met. This is NOT helped by FC putting the brakes on their own secondary market and driving their more discerning lenders to other platforms!    

Saving Stream – Is the New Pre-Funding Option the Way Forward?

In my last post I described how massive demand for loans on the Saving Stream platform had resulted in many lenders being locked out of recent loans while greedy lenders with big pockets were snatching up everything in sight.

The Solution

I’m pleased to announce that Saving Stream have come up with a simple fix – the Pre-Funding Option.  This allows each lender to set up an amount they are prepared to invest in each new loan.  This means everyone who wants ‘in’ will get a share of the loan.  While those with big pockets will obviously get only a proportion of their pre-funding amount they won’t be able to steal from smaller bidders.

Not Perfect but ..

Like all fixes, it isn’t perfect but, with the demand for loan parts on the secondary market, anyone who has second thoughts can easily sell all or part of a share in a loan.  As with existing Saving Stream loans, you can bid without having to have the money in your SS account.  Once you know the size of loan you have been allocated you can transfer the cash into your SS account retrospectively.

I for one am happy with this solution and look forward to participating in future loans on the Saving Steam platform!

UPDATE (11 Sep 2015)

The New Pre-Funding option seems to be working well.  My first loan was scaled back significantly from the amount I offered but the second was taken up in full.  All I need to do in each case was settle up via a bank transfer once I received the email.  I love the simplicity of SS.  12% across the board and the ability to pre-bid and then pay later.  What's not to like?  

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!

ABLRATE – What’s in a Name? Yet another Asset-based P2P Loan Platform

This is how ABLRATE describe themselves:

Ablrate is a peer lending platform that provides asset finance to a diverse range of businesses. Our platform was initially launched to allow our Lending Members access to the lucrative aircraft leasing space. The sector is highly regulated, has bank finance involved and can provide lenders with excellent returns and security. 

The platform was expanded to give Lending Members access to asset finance deals in capital equipment, property and any other transactions where our members have good security and good returns.  Ablrate was named as the 'abl' stands for 'Asset Backed Lending' which is at the core of our platform and will remain so.

Interface

Ablrate has pleasing platform user interface and offers very rapid crediting of bank transfer deposits (ie a few minutes).  Interest rates currently vary from 10-14%.  There were no loans available when I joined so I bought £300 worth of a bottling plant loan on the secondary market just to try the platform out.

Aircraft Leasing

As well as aircraft leasing they also do manufacturing plants and marine containers.  I’ve recently added a £300 loan against marine containers (14%) with a term of around 6 months.
The secondary market allows you to buy and sell loans at a premium of discount, in a similar way to Funding Circle.  Other asset based platforms that do have a secondary market, currently only allow you to buy or sell at value.

Any Good?

My main problem with Ablrate (apart from the odd name), so far, has been a lack of new loans. However, I feel Ablrate has a lot going for it and offers good support via the P2P Independent Forum and has an interesting portfolio of loans.  The company appears to have significant knowledge of the aviation leasing market and that differentiates them from the other asset-based loan companies who follow the ‘pawnbroker’ or ‘bricks and land’ models.

Summary:

• Interest rates: 10-14%
• Secondary market (with premiums and discounts)
• Length of loans 6 months - 5 years
• Quick deposits
• Asset-based

Ablerate is a P2PL platform to watch.  But, as with its rivals such as Saving Stream, Money Thing and Funding Secure, it is too early to make a clear judgement.  Only when these platforms have been tested with a few defaults will we be able to make a more considered assessment.

Money Thing – Another 12% interest, Asset-based Loan Platform

Money Thing is, in many ways, similar to Saving Stream, which I wrote about in my last post.  All Money Thing loans offer 12% interest and are typically secured against personal property such as art, cars, planes or jewellery.  It’s a bit like a high Street Pawnbroker.

The Loan to Value Ratio (LTV) is typically 50%, ensuring that selling the asset should cover the loan.  The terms are usually 6 months.  This gives good liquidity as you can get your money plus interest back over a relatively short period.

The web site is easy to use and the customer support also appears to be good.  You can check what loans are coming on stream on the P2P Independent Forum.  As with other high interest platforms, new loans are in great demand but the platform currently, typically limits the size of your investment, in a 24hr period, ensuring that as many lenders as possible get a bite of the cherry.

Portfolios

The platform also lumps smaller loans together into a portfolio of typically £10k to £50k.  This makes lending easier to manage.

Fast Transfers

Money Thing deposit your incoming cash very quickly so if you do a ‘fast’ bank transfer they typically acknowledge the deposit in less than an hour so you can then invest.

Note: Saving Stream go one step further and allow you invest as long as you have made a transfer (ie they don’t wait to receive the transfer).

Interesting

PRENDING can be soulless but adding varied objects adds interest to lending.  My loans include security against a Porsche, a portfolio of electronics, a Piper plane plus 4 paintings.  Much easier to visualise rather than endless lists of bricks and mortar! 

Saving Stream, Peer to Peer Lending Paying TWELVE PERCENT (12%) !

• No fees
• Secured Loans
• Contingency Fund

Too Good to be True? 

You might think so but their track record to date is pretty good.  There have been no defaults so far.  It’s well worth checking out what other lenders think by visiting the ‘Peer to Peer Independent Forum’ (you can find the link in the column to the right of this post).  There is a specific area of the Forum dedicated to Saving Stream.

A lot to Like

There is a lot to like about Saving Stream.  The platform is very simple and straight forward.  It reminds me of the Ronseal Ad, ‘It does exactly what it says on the tin’.

Minimum investment is £100 and minimum investment per loan is also £100.  Loans are typically bridging loans for property, interest only and are 6-12 months in duration.  The short term means that your money isn’t locked away for long periods.  The 12% interest rate is fixed for every loan so effectively they have averaged out the rate to keep the platform simple.

Secondary Market

There is a secondary market where you/buy sell at cost (ie no markup or mark down).  In practice, with the 12% rate, there are not many sellers.  The secondary market offers a mechanism to spread your risk across existing loans.  You’ll find new loans disappear fairly quickly.

What If?

One thing to remember about asset-based loans, if the worse happens, a default, then you won’t get your money back for some time as the asset will need to be sold.  You are also relying on the valuation being accurate.

I would recommend Saving Stream, based on my experience so far, but do weigh the risks and spread your money both between loans and across other platforms!