Peer to Peer Lending – 12 Month Review

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% and 4.1% respectively.

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%

Loan Parts

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.

Short Loans

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.

Bad Debts

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!

100 Club

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.
Fees
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!]

25 thoughts on “Peer to Peer Lending – 12 Month Review

  1. Hi weenie

    I'm also still having success with Ratesetter and like you I'm in the 3 year market. I've placed a fairly big bet and now have well into 5 figures £'s in P2P. According to their website I'm achieving 4.8% today. Having calculated return accurately since I started in May 2014 I can confirm I've actually earned 4.4% historically which is a lot better than my derogatory savings account interest. I believe the majority of the difference stems from the time it takes to get new money as well as principle/interest payments back into the market each time. Overall I'm still a happy customer.

    Full disclosure: I have no affiliation with Ratesetter. I'm just a satisfied customer.

    Cheers
    RIT

  2. Hi Weenie, can I ask is the capital and interest which is relent each month repaid again in your original term or does the 3 year term start at the point it is relent?

  3. RateSetter does sound pretty good. I have been with Zopa for a good few years now but have been looking to diversify my P2P investments a little. I think I may give it a go!

    Thanks for the great write up.

  4. Hi RIT
    Yes, 4.8% is a great rate compared to savings accounts – I'm not ready to risk as much capital as you have in P2P just yet but I'm taking a bit more risk by going with Funding Circle and their higher interest rates. Yes, I've noticed that occasionally there is a delay in payments, eg a borrower could be a bit late which does account for slight variances in the interest to be earned.

    Thanks for stopping by and confirming that P2P is an option to consider in anyone's portfolio!

  5. Hi Jools

    The 3 year term (if you are lending for 3 years) will start at the point the capital/interest is relent, as it will be a new loan.

    For example, with Ratesetter, every month, £26.98 capital is repaid, as well as £2.72 interest.

    I can choose to withdraw these funds, or do nothing, leaving the cash in the holding account, or relend/reinvest in another Ratesetter loan.

    If I choose the latter, I can opt for another 3 year loan, or a loan for a longer period (5 years) or shorter (1 month or 1 year).

    Note that the interest rates change all the time, so you could bag a 3 year loan paying a different interest rate than your original.

    My 3 year loan with Ratesetter was 4.5% – today, they are going for 5.7% and the 1 year loan is at 4%!

    Thanks for stopping by, hope this helps!

  6. Hi DD
    When I was doing my original research, it was a toss up between Zopa and Ratesetter and I just went for the latter – no particular reason, only because I had to choose one, I thought they were pretty similar! If I decide to invest in them in the future, I'll drop you a note for a referral code 🙂

    Good to hear that you've been doing P2P successfully for a number of years – more confirmation for me that it's a long term investment to continue with!

  7. Yes, I have an article written up but unpublished on my experience with Zopa. It has overall been very positive. The fact that RateSetter now do not charge lender fees is very interesting (and attractive). The fact they offer more flexible lending options (and excellent rates) all seems too good to be true. I will experiment!

    By all means do. The Zopa refer the friends is a little more extreme. You both get £50 but only if the referee puts in at least £2000.

    If I was planning to invest at least £1000 in RateSetter (I never open an investment at that level) the referral figure is pretty good.

    Thanks again for the write up!

  8. Great detailed overview of your 1 year with P2P lending. As you know I love Ratesetter and I mainly use the one month loan feature. I love seeing my money grow month by month, allbeit at a slow pace but it all counts. The high rates with Funding Circle sound fabulous but I still have to phone them and get back into my account again as I lost my login details. Since I have only small amounts of cash to invest I will stick to Ratesetter for now. Zopa interest rates are getting lower all the time and it is taking longer and longer to lend money there so it is putting me off. I might actually take my capital from there and put it into Ratesetter.

  9. Great summary weenie, thanks!

    As I mentioned a few posts ago my cash reserves right now are very low having plowed a load of money into my SIPP and also I just stuck a couple of K into The House Crowd. But when I've built the reserves back up I will most definitely be looking at the funding circle, I like both the higher interest rates (who wouldn't) plus the fact that you can choose what companies to invest in, that is a really great feature.

  10. Very cool to read about your experience with P2P lending. This is something we can't do in Canada just quite yet but it has been interesting for me reading other people's experience with P2P lending. Thanks for sharing.

  11. Hi TFS
    Glad you found it useful. Yes, I like that you can choose the companies to invest in with Funding Circle, just makes me feel a bit more involved in the lending process.

    Interesting that you mention The House Crowd as I'd like to find out more about that. What kind of returns are you expecting from this investment? Would be great if you could write a post about that! 🙂

  12. Hi Laura
    Yes, it's great to see the money grow steadily – as I get small payments from Funding Circle all the time, I can see increases on a weekly, sometimes daily basis.

  13. Hi Tawcan
    Glad you enjoyed the read. I know they have P2P in the US so perhaps it is only a matter of time before this type of investment will be available to the folks in Canada too. Certainly, it's not for everyone but it's worth considering as an alternative place to earn interest instead of your usual bank accounts.

  14. Hi weenie

    I have invested in one of their house projects (actually a big unit comprising flats and some retail units) which I think is still in need of funding if you are still interested and have spare cash it looks like a really good investment. They reckon the total return will be in the 20% per year range but let's be realistic and say after fee's etc it will be 10-12% I would be very happy with that still obviously! The other "product" they had was called a bridging loan which is basically them relending your money out to other property investors which returns a solid 9% which again is fantastic. This seems more set in stone because it doesn't rely on the return from the actual property investments that back it up as far as I can tell, so the people taking the loan simply have to pay it back at that rate (well I guess above that rate as HC will take a cut) unless they default obviously. If they do it is backed up by bricks and mortar though and HC don't just lend that fund out to any old investor so I think the risk of that is fairly small. (hopefully!!!)

    Toyed with the idea of a post on it but seeing as I only just invested in it myself I have no proof on whether it will turn out to be a good investment or not… but… I guess I could at least just write down my thoughts on why I decided to try it out at the least.

    Hmm. Seeing as I already wrote a lot on the above I guess maybe it would be worth expanding that into a post now… hah 🙂

    Cheers!

  15. Thanks for the write up 🙂

    P2P looks good and you mention that you are possibly helping small local businesses as well, which is nice.

    The rates on Funding Circle look appealing! P2P lending does look attractive for the moment while I am suspicious that bond (funds) are over valued. I guess no one knows how these platforms will deal with the next recession and that is the major risk with it?

    That said I think this year I will also dip my toe into the P2P market. As the tax free interest comes in next year it's going to make this even more attractive.

    Do you consider it part of your cash or equity allocation? 10%+ on Funding feels pretty risky!

    Mr Z

  16. Hi Mr Z
    No probs – glad you found it useful!
    Yes, there is a risk in what happens with the next recession – would the secondary market be flooded as lenders try to cash in their loans early, would there be more borrowers defaulting, what would happen to the interest rates etc?

    I consider P2P as part of my equity allocation as it is risky compared to my cash and my premium bonds!

    Well, it's as risky as any other investment not covered by the FSCS and as long as you're not putting all your eggs in one basket, it's worth considering adding to your portfolio.

  17. Thanks for that TFS – I was closing to investing in another BTL property last year (going halves with my sister) but she ended up going alone and I don't have enough to get another property on my own, so I've been interested in hearing about crowdfunding BTL. I will have a little read and consider when I have some spare cash to invest. I look forward to reading your detailed post! 🙂

  18. Thanks for sharing your update regarding P2P lending. I know many other dividend bloggers are using this method for creating an alternative source of passive income but I'm still on the sidelines regarding this method. Never heard of those P2P sites before. Just know Lending Club and Prosper. Thanks for sharing your overview and experience. As I mentioned, I'll still sit on the sidelines before trying these.

  19. Hey weenie, I used to invest in P2P too, but later I didn't like that you cannot do anything with notes which get delinquent. With a stock or stock option you can still do something – sell it to limit the loss, roll it, hedge it or whatever, but with P2P you can't do anything. Once delinquent or late, you are most likely going to lose that investment. More like gambling.. Also not sure how that works in UK but Lending Club or Prosper doesn't offer too much info about a borrower, so filtering out potential bad loans is almost impossible. So I stopped about two years ago and no longer invest in P2P.

  20. Hi DH
    Yes, P2P is still a fairly new concept and is not for everyone. I don't mind it being a small part of my investment portfolio but am unlikely to throw a lot of funds at this. Thanks for stopping by and glad you enjoyed the post.

  21. Hi Martin, thanks for sharing your views and experience of P2P – it's great to hear both sides of the story. In the UK, most of the P2P companies don't provide much info about borrowers but Funding Circle is one company (which loans to small businesses) where you get to read about them before choosing to loan your money out. Fortunately, I haven't suffered any losses/defaults yet. For now, I'm happy continuing with my investment but am aware of the risks involved, hence am unlikely to be ploughing a lot more money into P2P.

    Thanks for stopping by!

  22. I had a look at RebuildingSociety and it looks interesting. I'm looking for a bit of diversification in my P2P lending so this will be one for me to consider. Thanks for stopping by.

  23. Pingback: Tweaking my Investment Strategy | Quietly Saving

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