Peer-to-peer lending concept

June 27th, 2013
Folk2Folk

Folk2Folk is one of the latest companies to join the peer-to-peer arena, and is based in the South West of England.  They have published a useful document on peer-to-peer lending, which is worth republishing here, and gives us a mention too.

Peer-to-Peer Lending – a concept you are likely to hear much more of over the coming years

There are many good reasons why you would need to borrow money, such as to invest in a business, secure short-term funding or to refinance a  loan at a better rate of interest, to name but a few.  Two of the most popular avenues to borrow money are from a bank or from friends and family.

However, a third group is fast catching up – Peer-to-Peer lenders.  Peer-to-Peer lenders are everyday people who have money and wish to lend it, in return for a competitive rate of interest (usually between 6-12% pa).

There have been many peer-to-peer lending platforms set up over recent years and their popularity with both lenders and borrowers is increasing at quite an astonishing rate.

The Peer-to-Peer lending platforms make the process of introducing lenders and borrowers very simple and the platforms are often exclusively web based.  They take much of the administration away that borrowers experience with their high street bank.

The various platforms do differ and it can be confusing to know which platform a borrower or lender/investor should use. There are platforms that lend to individuals for their personal needs and those that lend only to businesses.  Some platforms require no security; others require personal guarantees or require borrowers to put forward property as security.  There are a few comparison websites such as www.p2pmoney.co.uk, helping demystify the various platforms.

There are of course risks involved for those using Peer-to-Peer lending platforms as the industry at the moment is not regulated, although this is due to change in April 2014.  Many of the platforms are building in safeguards for lenders.  The various platforms claim to carefully vet borrowers by carrying out credit searches etc.

Lenders should be wary that the interest rates quoted often do not factor in the average default rate and the various platforms have different levels of default.  The headline interest rate is therefore not the only thing to consider.  Investors/ lenders should also consider the form of security being put forward by borrowers.  The form of security will likely alter the rate of recovery.

One peer-to-peer platform has focused on property finance in the South West and is applying a “local touch” by drawing upon local knowledge of the property market and borrowers generally.  Folk2Folk was launched in February this year and has already introduced £4 million of secured loans (£11 million if you include loans in place at launch).  Folk2Folk introduce loans largely to the business community starting from £25,000 and up to £1million, at interest rates typically of 7-9%.  Loans are secured by a first mortgage on property, other than the borrower’s home.

Loans introduced to date have gone towards projects such as house building, commercial leisure facilities and property acquisitions, together with various renewable projects.  The largest loan to date is £1 million.

One of the key attractions of Folk2Folk is the speed in which it can process and deliver loans, completing the process within 7-10 days from application.

Folk2Folk has uncovered a significant lender appetite and has recently embarked on a marketing strategy to locate a higher number of borrowers to satisfy lender requirements.

It is certainly a fascinating time for peer-to-peer lending platforms, which are quickly finding themselves able to fill some of the Funding Gap.

It really is a return to basic principles of lending and borrowing and its simplicity is part of the reason for its success.

RateSetter P2P returns

June 27th, 2013
RateSetter

There was a comment made on the P2P money blog recently from one of RateSetter's lenders.  Alex Gower, RateSetter's Marketing Director, asked if he could respond to this comment, which we were more than happy to facilitate.

I wanted to respond to the poster who commented upon the returns he was getting from RateSetter and explain the principles of how returns are calculated. The simple answer is that calculating P2P returns can be complex and sadly is not a straightforward exercise. I will do my best to explain:

This simplest example I can give you is the RateSetter One Year Bond – the last matched rate today was 3%.

If you invested £2,000 in the 1 Year Bond at 3% today, you would receive at the end of the one year term £2,060. We pay this amount gross to lenders, and it is their responsibility to pay tax on this (at the same rate they would with a bank savings account).

Interest is calculated and accrues each and every day the money is on loan according to the base rate (which you can see in the contract). The interest compounds up to create the 3% at the end of the term -  this is calculated in a similar way as an AER from a bank.

Our Monthly Access account works in the same way, with a 30 day contract – lenders are paid all the capital and accrued interest after 30 days, and you choose to continue to lend or withdraw.

RateSetter Lenders do not suffer the problem of bad debt in the same way as they do on other peer to peer platforms – RateSetter protects Lenders using a Provision Fund (http://www.ratesetter.com/lending/provision_fund.aspx), the concept we pioneered when we launched. It’s designed to ensure that peer to peer lending is as simple and safe as we can make it, and has over £1m in it to protect Lenders. The Provision Fund has ensured that every single lender has received every penny of capital and interest – the only P2P company to have achieved this.

So far, so (relatively) simple!

Where it becomes more confusing is with the longer term markets (3 Year Income and 5 Year Income). Unlike a savings account, these markets are amortizing – that is, the capital and interest is paid back in monthly instalments by the borrower. This is clearly different to a savings account – banks rarely force you to draw down your money…! This creates a challenge – the lender has to make a decision what to do with these repayments. We allow lenders to set “Reinvestments Settings” which decide what to do with these repayments – reinvest (at Your Rate or the Market Rate), reinvest in a different market, or withdraw the money. Similarly, you may receive “early repayments”: borrowers are allowed to repay some or all of their loan at any point during the term of the loan with no penalty. Whilst this is good for lenders (who get their money back), it means that the contract ends and needs to be replaced with a new one. These are treated in the same way as repayments according to the Reinvestment Settings.

Rates are calculated in the same way as the 1 Year Bond example, but - to give a fair comparison with an AER - assume that you will reinvest those monthly repayments at the same rate you originally lent at.

So the key point is: Rates are fixed to the contract, but the return is variable; it is dependent on the variation in terms that borrowers eventually take, and the variation in rates on the contracts you match whilst you are invested. So, to achieve quoted rates, the expectation is that you continually reinvest your money (at the same rate as the contract states) and achieve the compounding effect. This is how all P2P companies display their rates to overcome these quirks of peer to peer.

The key point is that you earn interest on money that is on loan: it’s a central principle of P2P that you only earn interest on what is on loan at any given time. So over time, you will end up with (probably hundreds of) different contracts earning differing rates, but knowing that whenever money is out on loan it is earning interest. You also have the comfort that all of your contracts are covered by the protection of the Provision Fund.

Calculating an accurate return therefore is not necessarily possible: the rates give a good guidance to what you are going to return but necessarily have to make assumptions about the future. We are however proud to say that we have returned lenders the capital and interest they have expected, and that has been reflected in the growth that we have seen.

Finally, the tax point is important to consider for those investing in p2p – we would always recommend that people take whatever tax efficient allowances they can, such as ISAs. The sad reality is that people quickly exhaust those allowances, and few options offer a similar return with as low a risk as lending on RateSetter. Our bad debt rates (absorbed by the fund) are exceptionally low (0.35% of funds matched) and tell the tale of an exhaustive and exceptionally cautious credit policy, which approves only 10% of people who apply for a loan.

Funding Circle rate change comments

June 24th, 2013
Funding Circle

The change this morning to minimum lending rates has generated a lot of comments, with no less than 177 comments on the thread entitled introducing new minimum bid rates for new loans, most of them against this.  So why would lenders - who would potentially benefit from this - be against this change ?

Firstly, current lenders have found some of their recent loans are at rates below the minimum and will now find it a lot harder to sell them if they wish to.  Secondly some lenders were concerned by the lack of communication, although Funding Circle did state that they did consult with some lenders, but did not want to make this information available to a wider group, as it would have an impact on the market.

Have Funding Circle done the right thing ?  In our opinion - yes - but they could have had a gradual increase from 4% to 10.5%.  Why has Funding Circle done this ?  Over the last year Funding Circle has become a bit of a victim of its own success, and lending rates have tumbled recently, with some lenders offering money at rates that perhaps do not take into account the impact of bad debts.

This will have a short term impact as some lenders voice concerns, but this would prevent a longer term problem if those same lenders found themselves sitting on bad debts that consumed all of their interest and ate into their investments.

Funding Circle raise minimum lending rates

June 24th, 2013
Funding Circle

Funding Circle have raised the minimum lending rate from 4% to between 6% and 10.5% depending on the market.  Funding Circle state this change will "promote a sustainable marketplace for both investors and businesses".  This suggests that the lending rates had dropped to a point where Funding Circle were concerned that lenders were not taking into account the impact of bad debt, which would otherwise have accounted for a significant portion of the interest a lender would recieve.

Here is the statement in full:

Introducing new minimum bid rates

We want lending at Funding Circle to be as rewarding as possible for our investor community. Which is why from 08:00 today (Monday 24th June) we are trialling a different minimum bid rate for each risk band, applicable to all new loan requests.

The previous minimum bid rate for new loans was 4% across each risk band (A+ to C) and these have now been adjusted to the following:

A+    6%
A      7.5%
B      9.3%
C      10.5%

We believe that introducing these minimum bid rates will promote a sustainable marketplace for both investors and businesses.

What does it mean if I place bids manually?

All you need to remember is that there is a new minimum rate you can bid at, which depends on the risk band of a business. This will be the minimum rate you can select on the loan auction page, where 4% was the previous minimum.

What does it mean if I use Autobid?

Autobid will only ever bid on loan auctions at or above your Autobid rate. If your Autobid settings are below the minimum bid rate, Autobid will automatically bid on the marketplace at the minimum rate.

The minimum bid rate only applies to new loan auctions, so if you're buying loan parts from other people, Autobid will buy loan parts at or above your Autobid rate.

You can read more about why we have introduced minimum bid rates and how it will work on our blog.

These changes have been reflected in our updated investor T&Cs (and by continuing to lend through Funding Circle you are bound by these). 

Enjoy lending,  

The Funding Circle Team 

Zopa loans at 4.9% APR again

June 18th, 2013
Zopa

Zopa, the leading peer-to-peer company in the UK, have loans of between £8000 and £15,000 over 36, 48 and 60 months at a record low of 4.9% APR for an A* borrower.  This is an extension to previous offer from May.  This is a market leading rate and should attract a number of borrowers.