It’s been 12 months since I decided to dip my toe into the world of peer to peer (P2P) lending.
Cash was sitting in my ISA account earning just 1.25% (was 1.5% until the rate was cut) and I was tempted by the higher returns offered by P2P lending but didn’t know anything about it.
After a bit of reading and research, and then hearing that P2P lending had become regulated by the FCA (Financial Conduct Authority) in April 2014, I was encouraged to risk some of my money, although it’s worth noting that P2P is still not covered by the FSCS (Financial Services Compensation Scheme) so in a worse case scenario, I could end up losing my cash.
Anyway, I took £2k out of my ISA and split the money between two P2P platforms, Ratesetter
and Lending Works
, both of which loan out to individuals. My loans were for 3 years at around 4.5%
You are not able to decide who your money is loaned out to, but as far as I am aware, all borrowers are credit checked as with any other loan application. My loans are split over a number of borrowers so if any one were to default, risk would be reduced/limited.
Each month, part of my capital is paid back, along with interest and I’ve been reinvesting both capital and interest. As at 4th June 2015, my peer to peer portfolio had a value of £2,098.15
Had my cash remained in my ISA, the value would have been only £2,025 – by switching to P2P, I received an extra £73.15. This amount is taxable, but from April 2016, it will be tax free as my modest portfolio will fall under the £1000 band of interest earned.
I noticed that other bloggers who had P2P lending in their portfolios were using Funding Circle
, which loans out to UK businesses. I had looked at Funding Circle originally but had thought that their claims of 10%+ interest rates too risky and somewhat unrealistic.
Anyway, I looked into the company some more and since August 2014, I’ve been diverting most of the capital and interest that I receive from my other two P2P lending platforms into Funding Circle, with one of my reasons for switching being the higher interest rates available.
Choose Who You Lend To
The big difference with Funding Circle (compared to the other two platforms I’m using) is that you can choose who you lend your money to.
Businesses are given risk ratings from A+ to C- and you can read a brief business profile, basic credit score, financial summary, repayment history (if any), plus there’s a Q & A section where you can ask the potential borrower questions. [Edit 13/07/15- since this article was posted, businesses are now rated from A+ through to E]
When you see a company that you want to lend to, you can submit a bid, from as little as £20 and select the rate at which you want to loan at, generally (from what I’ve seen) from around 5.5% up to 11.5%. I usually take my guidance from what rates the other bids are at.
Of course, if this all seems rather labour intensive, you can always use the ‘Autobid’ function, set your criteria and the platform does it all for you.
Anyway, most of the businesses I lend to are in the A+ or A category, although there are few B’s and a couple of C’s, eg from my portfolio:
Property Development in Ealing, risk rating A+, lending rate 9.5%
Business Expansion Loan, risk rating B, lending rate 11.8%
Cementing Company Commitments, risk rating C, lending rate 9.8%
Loans range from 24 months to 60 months but as well as bidding on loans, it is also possible to buy loan parts (secondary market), which often have less repayments/time remaining, eg recently, I bought a loan part that only had 10 repayments remaining. Sometimes, it’s possible to pick these up at a small discount, so I’ve found them worth checking out. Also with these, you can see the repayment history of the borrower.
I’ve mentioned above the usual loan ranges but thought I’d also mention that with Ratesetter, you can loan out for one month at a time. It’s an option that I tried out and one that I’m likely to use again in the future. At times, the rate for such monthly loans have been up to 3.4% which I think is pretty good for a short term loan (and short term risk).
Cashing in Loans Early
Much in the same way that you can buy loan parts, if you need to cash in your loans early, you can put them up for sale on the secondary market, which other Funding Circle members can purchase. I haven’t done this yet so can’t comment from experience but for a small charge (0.25% of the loan part), it is possible to get to your cash if required.
Of course, the headline interest rates are excellent if none of the borrowers default. You do need to look at the figure which takes into account fees deducted and a prediction of bad debt, which of course, may or may not occur during the life/lives of your loans. After one year, I have not had any defaults on any of my loans – long may this continue!
The Funding Circle has what it calls a ‘100 Club’, whereby investors are lending to at least 100 different businesses and only lending out a maximum of 1% of their total amount to any one business to minimise their risk and exposure to any one company they are lending out to.
Currently, I am lending to 33 businesses, with maximum exposure to any one business at 6.8% so I’ve got a way to go yet but I’m working on it slowly.
Loans Repaid Early
I believe there was (or maybe still is) a misguided view that people borrow from P2P lenders because they are not credit-worthy or cannot get loans from banks or building societies. Aside from good interest rates, another reason for borrowing from a P2P lender is that you can get loans quickly, credit checks don’t impact your credit score and loans can be repaid early with no penalty, so there’s the flexibility aspect of going for such loans.
The latter is what happened on my Lending Works account – there was one month where I logged on and instead of just seeing my usual monthly capital repayment and interest in my available funds, there was also an unexpected £200 sitting in there because a lump sum of my loan had been repaid early by the borrower, which I then reinvested.
Ratesetter does not charge fees to lenders, so no platform fees whatsoever. Lending Works doesn’t either but annoyingly, when I originally signed up with them, they did and this fee was whipped out upfront in the first month all in one go! Unexpected, because I didn’t spot this in the FAQ and I’m still a little annoyed about it.
Funding Circle charges 1%, which is taken off as repayments are made by the borrower.
Active or Passive?
P2P can be active, in that you can take on a active role by manually investing, which is currently what I do, only because I enjoy it and have the time to do a bit of tinkering.
Or, it can be relatively passive if you use the autobid/autoinvest function. However, if you use Funding Circle, I’ve heard mixed reviews about using their auto function. I’ve never used this function myself with them, but I found the Ratesetter autofunction ok to use.
Peer to Peer Lending in your Portfolio
I for one have been very happy with my own peer to peer lending experience so far and think it adds a nice bit of diversification to my portfolio, although I am unlikely to add any new funds to the original £2k that I’ve invested – I think that’s my ‘risk’ threshold for something like this!
With that in mind, I’m happy to continue reinvesting all repayments and interest, and letting compound interest do its thing.
Plus, I like the idea that I am helping small British businesses invest and grow, hopefully leading to more jobs and economic activity in this country.
[NB – This post is not my recommendation to invest with any of the companies mentioned – it’s just my personal experience of using them. I also haven’t included any personal referral links here, but if after you’ve done your own research and you’d like a chance to earn yourself (and me!) £50 bonus with Funding Circle or £25 with Ratesetter or Lending Works, please drop me a note!]