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Funding Circle change lending model
Funding Circle, the leading peer-to-business provider in the UK, have announced that it is moving away from the current auction model for unsecured loans. This will be replaced with a market with fixed rates per risk band per lending term, and lenders will have to choice whether to lend at the prescribed rate or not. This would operate similar to the fixed rate lending on Funding Circle's secure loans.
Speaking to the P2P money website yesterday, David de Koning - Head of Communications at Funding Circle - explained that Funding Circle are competing with other financial institutions which can specify the interest rate early on, but the current auction system can only provide an interest rate after the auction has finished. This means that lenders funds can be tied up during the period of an auction, only for a business to reject the rate after the auction has closed.
While virtually all of Funding Circle's previous loans have been funded, the variable has been the interest rate. The new variable will be if the loan is funded by lenders at the rate specified. RateSetter remain the only one of the big three UK peer-to-peer companies that allow lenders to set the lending rate.
Below is the statement from Samir Desai, CEO and co-founder of Funding Circle:
Since we first launched Funding Circle our goal has been to enable investors to earn attractive, stable returns and to help small businesses access finance quickly at a fair, transparent price.
Recently, we have been reviewing in detail how Funding Circle operates, with a view to providing an improved service for both investors and borrowers. We have found that the current auction model has significant drawbacks, which we believe can be improved to give investors and borrowers a better experience, and ensure the long term sustainability of the marketplace.
After careful consideration we have taken the decision to move to fixed interest rates for all loans within the next month. I appreciate this is a big change, which is why I wanted to write to you today.
What’s the challenge with the auction model?
The auction model has existed since Funding Circle first launched in 2010 - enabling investors to choose the interest rate they wish to earn and the amount of money they wish to lend.
Whilst I know many investors have enjoyed the auction model, there are a number of disadvantages with it:
- Auctions tie-up investors’ funds: auctions typically last 7 or 14 days. During this time your money is not earning any interest and your bid may be knocked out by a lower rate. This means that investors may bid multiple times during an auction, with no guarantee their bid will be successful.
- Confusing and complex to understand: many investors tell us they want a simple, easy way to lend their money. Auctions can be confusing and unattractive, especially for new investors.
- Unattractive to borrowers: many business owners are put off by the lack of certainty around the cost of their loan.
How do fixed interest rate loans work?
Fixed interest rate loans are where Funding Circle sets the rate based on the risk of the loan and all investors achieve the same interest rate. We already operate fixed interest rates for property and asset finance loans.
The interest rate is based according to the risk of the loan, rather than the availability of investor funds. The rate is set before a business is listed and it is published on the marketplace for all investors to see. Rates will be set according to the risk band and the length of the business loan.
By setting the interest rate before a loan is listed on the marketplace, there is no need for the traditional auction. Loans will fund and be accepted by businesses more quickly, meaning your money is working harder for you.
Benefits of fixed interest rate loans
- Simpler and easier to understand: if you like a business you can bid knowing your offer rate cannot be knocked out by other investors.
- Your money works harder for you: by giving borrowers certainty of rate we expect businesses to accept their loans faster than they currently do, meaning your money is used more efficiently.
- More businesses to lend to: certainty of cost means more businesses will apply to Funding Circle, creating more lending opportunities for you.
How will this change affect me?
We believe this move is in the best long-term interest for the Funding Circle marketplace. For the majority of investors, fixed interest rate loans will deliver a better service and higher returns. From our analysis, if the new fixed interest rates had been introduced at the start of last year, 71% of investors would be earning a higher expected return. To help plan for the launch of fixed interest rates, we are releasing the new rates to all investors today. these are attached below.
We have taken this decision in the interests of the majority of our investors and the feedback we have received has been positive. 90% of you have previously told us that you would increase or maintain your investment through Funding Circle if more fixed interest rate loans were introduced.
We recognise, however, there are a group of investors who actively use the auction model to earn above average returns, and who will be unhappy with this news and whose overall return is likely to drop as a result. We hope those affected will still consider that they can earn an attractive return at Funding Circle and continue to lend through the platform.
How can I provide feedback?
This is a significant change to how Funding Circle operates. We want to be open with all investors and provide the opportunity to ask questions before we make this change.
Below are details about how you can be involved in the process:
- Investor evening: this will be held on 17 September and primarily focused on questions about fixed interest rate loans.
- Webinars: we will be hosting regular webinars to answer your questions. We will provide further information about these on the blog, forum and in your weekly email newsletter.
- Written feedback: investors can provide written feedback, found at our fixed interest rate webpage at www.fundingcircle.com/uk/fixedrate
If you would like to join any part of this process, please email us at [email protected].
This is a big, but necessary, move to continue to build Funding Circle into a successful, mainstream business. I hope this letter provides you with further information behind this important change and we look forward to answering any questions you have.
CEO and co-founder, Funding Circle
Funding Circle will be having another investor evening on the 17th September which will be focused on these changes, so lenders can quiz the company in detail.