Oh no – P2P Loan Default!

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As mentioned previously, I have some money invested in peer-to-peer (P2P) loans and things have gone swimmingly well after one and a half years.

P2P image

However, at the end of last month, I received notification of my first loan default! Oh no!

The default was on one of my loans with Funding Circle (FC) and I received the following message explaining the situation:

The borrower has been struggling to make its repayments since September 2015, and has requested a payment plan which would see the loan repaid over a longer period of time. We have informed the borrower that the only way we can agree to his proposed payment plan is for the guarantor to consent to a voluntary fixed charge over his personal property. The borrower has not responded to us since bringing up the matter of a voluntary fixed charge, and we are therefore defaulting this loan in order to protect your position by crystallising the liability of the guarantor. Defaulting will also enable us to commence legal proceedings against the guarantor, should the guarantor remain unresponsive. On a RAG (Red, Amber, Green) rating system, we would give this loan a Red status, as the prospect of recovery is uncertain at this point, however we are hopeful that this rating will improve once we have a better understanding of what the guarantors can afford to repay. For your reference, the original risk band for this loan was a B rating.

Keep Calm, Don’t Panic

So, it’s possible that I could end up not getting any more money back on this loan, but also possible that there’s a chance of recovery – it looks like I will have to wait and see.

Does this mean that I should consider withdrawing my money out of P2P altogether?

My thinking is no.

The value of the loan that defaulted was only £11. I don’t have any loans greater than £60 with FC; the smallest loans are around a tenner. The £1k or so that I have invested with FC is made up of over 50 such little loans, with the idea that if a couple of them were to default, the impact would not be so great. I’m trying to spread my exposure as thinly as possible – my current maximum exposure to any one business is 5.8%.

Of course, I run the risk of more than a couple of them defaulting in the future (and there’s an increasing chance of this happening with the changing economic climate), but that’s a risk I’m willing to take in order to make the most of the high interest rates that P2P currently offers.

I had been considering investing more into P2P, to try to increase my monthly income (currently around £10 – £11) but in light ofmy recent change in investment strategy to increase my dividend income and now this default, I’m not so sure I’d want to pump too much more into it.  I have a feeling that this won’t be the first or last loan default – just need to keep a cool head!

Something to ponder on when I look at what goals I want to achieve for 2016.

Anyone else had any experience with P2P loan defaults?

[Image courtesy of Consumer Fu]

 

26 thoughts on “Oh no – P2P Loan Default!”

  1. hi Weenie, I have money in Funding Circle and rushed to check my holdings after I read your post! My investments are recent-ish and fortunately no one has defaulted so far, but of course there’s always the risk. I agree with you though – as long as the amounts invested only represent a small part of the portfolio, it’s worth it for the higher returns.

    • Hi Cathy
      I don’t think I’ve done too badly with this only being my first default. When I first got into P2P and realised the higher returns you could get, it was tempting to shift a lot more money into it and get bigger loans but I feel that my strategy of investing just small amounts and keeping the overall amount invested in P2P only a small allocation of my portfolio, it’s good diversification. Thanks for stopping by and good luck with your FC loans.

      • hi Weenie, I have about equal amounts invested in FC and Zopa and have just dipped a toe into Ratesetter (and in fact have read what you say about your forays into P2P in previous posts with great interest). I will probably push the amount in Ratesetter up to the equivalent of what I have in the other two and then leave it at that for now – they can just keep ticking over. I agree with you about keeping it restrained! Investing in P2P seems to be very much about trying to manage the risk.

        • Hey Cathy
          Yes, I think the usual quip about ‘eggs’ and ‘baskets’ always springs to mind with P2P! I’m likely to put a little more in over the next year but then like you, will just keep them ticking over and reinvesting.

  2. Interesting article, weenie. I only have personal loans in P2P through Zopa and RateSetter and so far have received no defaults (a good handful of late payments though). I must admit that I am now in the process of halving my exposure to loans as the repayments come in (rather than reinvesting them). I plan to keep a good sized chunk of my funds in there though!

    • Hi DD
      Are you halving your exposure to put the rest on shares? I was thinking of adding to my P2P from next year but I need to build up my dividend income so not so sure now – maybe I’ll still up it a little. Thanks for stopping by.

  3. Hi Weenie,

    I’ve recently begun to experiment with P2P lending after reading about it on your blog.

    I’m currently using RateSetter, and they have a “provision fund” which caters for if/when borrowers miss a payment – they claim that they’ve never had to use it. I can’t remember whether RateSetter loans to businesses or individuals – a quick check at their and FC’s site suggests that RateSetter’s interest rates are slightly lower – but still well above what the banks are offering. It might be worth a look?
    All the best,

    • Hi Adam

      I am lending with RateSetter as well as FC, plus a few other P2P companies – I decided to just spread my risk! Yes, the provisional fund for RateSetter does sound comforting. They loan out to individuals, whereas FC loans out to businesses.

      It’s interesting to see that it was a ‘B’ rated loan that defaulted. I have a few ‘E’ rated (yes, E!) loans with FC which I decided to take a punt on – they’ve been paying ok so far at over 19% interest – again, I’ve only got small amounts out there to minimise exposure in the event of default. Most of mine are A or A+ rated.

      Good luck with your P2P lending!

  4. I’m commenting as someone who is not involved in P2P lending, so no defaults here. I’m not adverse to some risk, and I’m sure the borrowers are risk weighted accordingly, but in my view if you need a loan for anything other than a mortgage, you’re living beyond your means and have cash flow problems. In our poor economic climate, at a time when people are losing their jobs, default rates look more likely to me. I know a lot of FI’ers are all for P2P, so I’m in a minority here. Sorry Weenie you’ve had a default and sympathies to the borrower behind that default.

    • Hey Starla
      The borrower in this case was a retail company and yes, obviously had cash flow problems and I hope it can turn itself around.

      P2P isn’t for everyone, whether as a lender or a borrower – while it’s offering good rates, I’ll keep my money in as a lender, but because of the higher risk of default, it’ll remain a small part of my portfolio. I’ve just seen Retirement Investing Today’s latest post (http://www.retirementinvestingtoday.com/) and he’s invested big in P2P so it’ll be interesting to follow how he does with his portfolio. Thanks for stopping by!

      • Hi Richard
        I understand your stance on this. As I said to Starla, P2P isn’t everyone’s cup of tea. Despite the default, my return on P2P is around 8% so far which I’m happy with so don’t mind risking a small part of my portfolio.

  5. Hi Weenie

    Having noted the fearful comments from the non-investors above, I’m going to attempt to redress the balance and introduce some rationality.

    I’ve been invested in Zopa since 2005 and more recently FC, Ratesetter and Rebuilding Society (v small amount). Defaults are an integral part of the game. The risk is why you get the slightly higher reward. Just to settle you down I’ve given up counting or worrying about defaults. Both Zopa (which now protect you against defaults) and FC, have both returned over 6%. Zopa returns obviously include the last ‘hiccup’ in 2008. My advice, in line with FCs advice is to spread your risk slightly more than it sounds like you’re doing. FC recommend no more than 0.5% to any lender I believe. This will reduce the effect of defaults.

    Does this make it ‘safe’. No. Could there be a large scale default if the economy broke down? Maybe. If there was though, you’d have more than your investments to worry about! In such a situation, would money in the bank be safe? Would money under the mattress be safe? Life is full of risk. Assess it and invest accordingly.

    Tim

    • Hi Tim

      Thanks for putting me (and other/potential P2P investors) at ease! This is my first default and I know it won’t be my last one so I hope I too will stop counting/worrying about them and just look at the overall return I’m getting.

      My 5.8% exposure with any individual business with FC is lower than it used to be and going down all the time, but yeah, still a little on the high side. I’m actually aiming for at least 100 businesses @ 1% or something like that – just harder to achieve as I haven’t injected any new money into P2P, I’ve just been spreading the risk via reinvestment.

      And you’re right, it doesn’t make it safe, just reduces risk a bit.

      I’m happy to continue with my P2P and to probably put a little bit more in.

      Thanks for stopping by and good luck with your P2P investments!

      • As you know, I’ve been doing p2p with zopa since 2006 and also with FC, ratesetter and rebuilding society on more recent years. I’ve never had a default or a late payment. As Tim says, the key is about managing risk. Nothing is really safe, it’s just about what risks you’re willing to take and how to mitigate against problems.

        Cheers

        • Hey M
          Cheers for the vote of confidence on P2P, you’re one of the few P2P ‘veteran’s I know.I can’t believe I’d never heard of them before but now that I’m invested in them, I’m happy to continue, whilst being aware of the risks.

  6. Hi Weenie,
    Sorry to hear about your loan default.
    Having read about P2P lending for a while I finally took the plunge and opened an account with FC. I think your approach with lots of little loans is a good one and one I am going to follow as well. I’ve transferred the first few pounds and my first bid has already been accepted! I have another 4 bids on the go – at the moment I am not venturing outside the A+ – C bands though…

    Are you using Autobid and if you do: what experiences have you made using it? I found it a bit strange that I wasn’t able to put in the amount of money I wanted to invest – it always came back with a percentage of portfolio. Maybe I wasn’t looking in the right place though.

    Regards, Pinch

    • Hi Pinch

      I haven’t tried FC’s Autobid function, preferring to either bid on the loans myself or to buy Loan Parts.

      When you go down the Loan Parts route, your loans are matched immediately. You can set the criteria so that you can set the max value of loan you want to loan out, minimise the premium you may have to pay on such loan parts (I usually set it at 1.5% max), set the interest rate of loan parts you’re interested, set the risk rating, eg perhaps in your case A, B and C only. Do your usual due diligence on the loans and buy if you’re happy.

      Thanks for stopping by and good luck with your P2P!

  7. P2P is simply a more transparent and “honest” form of saving. If you put your money in a boring bank savings account, they lend it out in much the same way – except that you have no sight of what type of lending is going on. Of course, you also get the benefit of market distortative government guarantees that act to encourage reckless lending.

    That said, I have no money in P2P. I used the transparency to see where my wonga could go. Debt consolidation and unsustainable consumerism seemed to be common themes on the consumer sites and property speculation predominant on the business sites. Er, no thanks. Unethical and unlikely to offer sustainable returns for my FI life.

    Of course, I have reason to believe that conventional banks are doing anything different!

    • Hi SDG

      In a way, you’re right about the transparency and I guess sight of where the money is going and what it’s being used for has put people off.

      As you say, conventional banks are probably doing the same, although you do get the FSCS cover with them, unlike with P2P.

      I don’t mind continuing with P2P in a relatively small fashion, as long as the interest I make outweighs the defaults!

      Thanks for your comment and for stopping by!

  8. I have a fairly large chunk in Funding Circle as well as various other platforms. My tips to add to the essential diversification of loans point.

    1) Especially with more recent loans which appear to have been ‘watered down’ in quality on FC, a round of due diligence really will pay off. Try duedil dot com and tap in the company name to check for any red flags
    2) Do read and understand the Financial summary tab. If current liabilities exceed current assets for example, that’s a big alarm bell. Declining revenues should be questioned in the Q + A, and if not answered then again they’re a concern.
    3) Read the borrower profile carefully also – is it clearly explained as to what the loan is for, or does it sound like a thinly veiled cry for help?
    4) Ask yourself about the general area the business operates in. Do you want to be lending to a firm reliant on the oil and gas industry in today’s world for example?
    6) Use the Secondary Marketplace not just for buying. Regularly review your loans to check for any new bad news or especially worrying FC comments. If anything does crop up, sell! Also consider the fact that the point at which loans often go bad is after 6 months. You might want to bias your portfolio to ‘newer’ loans.
    7) Finally, where a loan does default, look again at all the information you had available to you when you agreed to lend. Was this foreseeable, did they have a credit score of 10 that you probably should have paid more attention to? 🙂

    Hope the above helps, but appreciate following all of this advice could generate alot of work for a well diversified portfolio – that’s the downside of FC!

    • Hi Alistiar

      Thanks for the heads up on Duedil.com – I’ve used it in the past but not specifially for P2P.

      Before each loan, I check all the info that is available on the companies. I have seen several where it really is a thinly disguised cry for help and of course, those are no-no’s.

      This isn’t a huge amount of extra work on my part (apart from the Duedil bit) but thanks for the advice. Also, hadn’t really thought about the ‘newer’ loans aspect.

      Thanks for your comments and for stopping by!

  10. While it sucks that one of your loans defaulted, that’s part of the game. It’s impossible to never loan money and not get a default. At least this was a very small amount and I agree shouldn’t stop you from continuing in the P2P world. I always appreciate any update regarding P2P loans because it is something I have in the back of my head to one day do. Of course, I want to read real experiences other have with this income generating platform.

    • Hi DH

      Agree, defaults are to be expected with P2P (unless you’re M (from There’s Value) who’s had no defaults) – as long as I am diversified with the loans I think I’ll do ok. I’m going to make a few small top ups this year to generate a bit more income.

      I’m glad you’ve found the update useful – I will continue to talk about my experiences with P2P to help with your own research.

      Thanks for stopping by and all the best for 2016!

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