This week’s TV coverage of peer to peer lending will spark off a whole new wave of interest in P2P platforms – or at least it will if the visitor stats on this website are a good barometer for public interest.
That got me thinking about the best way for newcomers to enter the market and begin investing. In essence, most platforms offer three entry routes to investment:
- The main auction site where new loans are listed
- An autobid function which lets you set investment criteria for the “system to follow” and bid on your behalf
- Some type of secondary market
For FundingKnight and other peer to business lenders who only offer loans to business, the secondary market typically lets investors sell loan parts (their investments) on to other investors – sometimes at a discount, sometimes at a premium.
If you like, P2P loan exchanges are a bit like the “buy it now” function on e-bay – instead of the thrill (and potential pain) of bidding in an auction, you can simply enter and exit the market, knowing exactly what you are buying and exactly what price you are paying.
That’s good for existing P2P investors because it creates liquidity – or access to cash. If you need access to the money you’ve invested in peer to peer lending, the loan exchange is your route to getting it, quickly. Some exchanges (FundingKnight is one example) even let you sell on part of an investment, which is far easier than having to sell more than you really need to.
But loan exchanges are also great for newbies. Just as my mother would be far more comfortable using “buy it now” on e-bay, newcomers might well be better off starting their P2P lending experience on the exchanges.
I think there are 3 main reasons:
You can start earning interest immediately
The loan parts listed on a loan exchange are live loans that are already up and running so as soon as you invest you start earning interest.
If you compare this to leaving your cash sat in an auction for days while you wait to find out if your bid has been successful, it starts to seem quite appealing – for you sanity as well as your financial health!
You can spread your investment more quickly
Most experienced investors agree that a sound P2P investment strategy relies on spreading your money out across as many loans as possible – diversification, in other words, just like any other investment strategy.
In the US, Lending Club regularly shout about their 800 club whose members – who have investments in at least 800 different loans – have never lost money. That’s a great proof of concept to support diversification, but how long does it take to bid in 800 auctions.
Using a loan exchange where you can quickly pick up new loan parts for your portfolio has the potential to be a far more productive use of your time.
You can be “in and out” quicker
As with the point about earning interest immediately, these loans are already running, giving investors the chance to buy up loan parts at an agreed rate of interest, knowing that there are only 6 months, for example, left to run on the loan.
Of course, a lot of the fun in peer to peer lending comes from the auctions. There are lots of people who enjoy playing the game and “winning” and that’s great – we need more participation in our financial system – but for the everyday saver who simply wants a better home for their money without having to sit in front of a computer each night, a loan exchange might well be a good idea.
This post was written by Hazel McHugh who works for FundingKnight, a peer to business lender who arranges crowdlending for businesses. It free to register at www.fundingknight.com and investing in fee free for lenders.
This week there has been some good coverage of peer-to-peer lending on the BBC's The One Show (after 23m 15s) which resulted is a massive 6000% increase in hourly hits on the P2P money site. Funding Circle confirmed to P2P Money they experienced record traffic for this time.
The vast majority of coverage is from the perspective of the lender, but we should also not forget that peer-to-peer lending requires borrowers. The rates borrowers can achieve with peer-to-peer lending are market leading for certain loan sizes, so borrowers can get a great deal.
Why suggestions from you are the key to constant improvement.
Back in November, I wrote a post about how P2P finance fits into the model of collaborative consumption – otherwise known as the sharing economy.
I made the point that collaborative finance didn’t necessarily need to equal ethical finance, social lending or any other type of ‘do-gooding’. Whilst some of the by-products of crowdlending might very well be good for the wider world (local lending for instance), most investors are in it for the returns, for the chance to make their cash work harder than it would do left in a straightforward deposit account. And that’s absolutely fine.
That doesn’t, however, break the link between P2P finance and the sharing economy. One thing that unites most of the new peer industries that have popped up over the last few years is participation. Peer based businesses need people to participate, whether that’s using someone else’s couch as a bed for the night, sharing a car or borrowing a Boris bike or participating in P2P finance.
By participating, I mean more than simply transacting. After all, transactions happen 24/7 in banks around the world. Participation is about contributing something more to the project, connecting with fellow users or participants and actively trying to make the overall experience more efficient and rewarding for everyone involved.
You see that at work in the forums that exist at Zopa or Funding Circle, you see it at work on this website which provides a great independent source of comparison, and you see it in action on all of the other online threads dedicated to educating new investors or sharing investment strategies.
Last week, I saw it in action from a FundingKnight investor who took the time to suggest some improvements to the lending platform.
Steve Lee, MD of Jumbocruiser, a luxury sleeper coach operator, is an active P2P investor. He uses a variety of P2P / P2B platforms to invest funds on behalf of himself, his company, the Jumbocruiser Retirement Benefits Scheme (where allowed) and Spenion Unlimited. (If you’d like to know more, you can read all about his thoughts on peer finance in this Q&A on the FundingKnight blog.)
On the 19th January, Steve got in touch with FundingKnight to suggest a change to the way that loans were listed on the FundingKnight website. Rather than a simple tick in the “bid made” column to show that a bid had been made, Steve wanted to see the actual amount that he’d bid.
Having exchanged emails over the weekend (and done some development and testing work), the change went live on Monday 21st January – which got me thinking about the responsiveness of small P2P lenders vs. large, global banks.
Having worked in a large bank in a previous life, I know that “change requests” are more likely to take years than days to implement. It’s not necessarily a reflection on the willingness of a bank to listen to customer feedback – although it’s often a struggle to get feedback through to the person who counts – but rather the obvious consequence of behemoth IT systems that have been adapted and added to over decades and now take significant work to change even the tiniest detail.
For peer to peer lenders, however, the agility of modern, responsive systems means that it’s often far easier to respond to customer suggestions and it’s exactly that type of participation that can keep this industry going from strength to strength and keep customers – both lenders and borrowers – at the heart of it.
By listening – and acting on – customer feedback, we can grow an alternative finance sector that avoids the “them and us” mentality that hampers banks. We can provide service that’s genuinely focused on the end customer and we can provide products, and platforms, that are fit for purpose and easy to use.
Steve himself said, “I was really grateful (my suggestions) were considered and I got a personal reply”. Let’s hope that investors continue submitting their suggestions and that P2P platforms do their best to respond… then together, we can build something that really does offer the best for everyone.
What are your experiences? Have you suggested a change to a P2P website? How was it handled? Do you think that P2P platforms are more responsive than big banks? Leave us a comment below.
The Christmas and new year period has given rise to a small but noticeable increase in late payments in the P2P companies that we are tracking. Zopa and RateSetter showed a very small increase, bringing their overall late payments to 0.64% and 0.14% respectively. Funding Circle, which currently are the best performing P2P company against their bad debt statistics, have shown a modest increase to 1.70%.
Encash (YES-secure) currently have late payments in excess of 7.41% as they only publish figures for loans that are more than 2 months late, as this is four times the rate of their nearest rival. The figures for Encash (YES-secure) are broken down into pre and post rebranding as their underwriting apparently was significantly improved. While the bad debt rates under the Encash brand are significantly better than under the YES-secure brand they are still more than twice the rate any of their competitors.
We should also not forget that bad debt rates for all of the companies, except YES-secure, are significantly better than estimates, and lenders with RateSetter have not suffered any loss due to the protection of the provision fund.
RateSetter have broken the £50million barrier, in terms of the loans they have arranged. This is a fantastic achievement for a peer-to-peer company. January and February are typically very busy months for personal loans, so expect to see this figure increase still further.
Well done to everyone at RateSetter, and their borrowers and lenders.