UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk by Assessing Platform Health

In my previous post, I outlined some of the factors leading to PtPL losses.  In this post I’ll look specifically at the risks associated with individual PtP platforms.  By the way, don’t believe the likes of Lord Adair Turner with his ‘Peer to Peer is Doomed’ nonsense.  Lord Turner has significant interest in a traditional business loans company hence his (biased) condemnation of Peer to Peer Lending!

I’ll ignore the big three; Zopa, Ratesetter and Funding Circle as their returns are relatively low (typically 4% - 7%) and the first two have provision funds to (hopefully) cover any losses.  The sites I favour pay 12% or more but with this comes obvious increased risk.  Typical examples are Saving Stream, Funding Secure and Money Thing. 

These platforms offer all their loans secured against material assets such as land, property, cars, boats, planes and works of art.  Incidentally, this is a much better deal than Funding Circle, where most of the loans are unsecured and the buyer must therefore factor in defaults with limited or no recovery of capital or remaining interest.

Here are two key ways to evaluate these platforms:

Number ONE:  Look at the state of the Secondary Market

These three platforms each have a secondary market where you can buy and sell loans held by other people rather than buying new loans.  But why would you want to do that, I hear you ask?  Well, you may wish to buy additional loans in order to diversify, ie spread your cash across more loans rather than waiting for new loans to appear.  Alternatively you may want to suddenly withdraw some cash rather than waiting until the end of a loan.

So what to look for?  After Christmas 2015 there was a UK PtP loan famine.  In other words there was nothing available on the secondary markets.  This is good news if you are selling loans but frustrating if you want to buy.  Now (late March) there is something of a glut.  The three platforms I mentioned all have loans to buy on the secondary market. 

What to look out for is platforms with too much on offer on the secondary market  or worse still new loans that are not fully funded.  If the platform offers the ability for sellers to off load unwanted loans at a discount, then are there a lot loans offered at a discount that are still not selling?  This may suggest that lenders are keen to offload existing loans even at a loss.  You then need to find out why they may be unhappy with the platform.  This brings me neatly to the second point.

Number TWO: Read the PtP Independent Forum 

The forum is UK-based but is also frequented by lenders in mainland Europe.   The financial expertise on this forum is amazing.  Find out what experienced lenders think of each platform and the quality of loans being offered.  Do others share your concern about a particular platform?  Use the forum to find out the default record of individual platforms and how often the capital and unpaid interest were eventually recovered.

Finally, as long as you keep well informed and don’t lend what you can’t afford to loose, I think you'll find PtPL is a much safer bet than playing the stock market roulette!

UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk and Tips to Avoid Losses

Evaluating Financial Risk

Provision Funds

Platforms such as Ratesetter and Zopa include a provision fund to cover any expected defaults.  This is one reason why the rates of interest offered are relatively low.  The best interest on offer is between5% and 6% with Ratesetter if you are prepared to lend your money for 5 years.

This post will focus on platforms with no provision fund where defaults may directly affect the returns available to the lender.

Unsecured Loans

Funding Circle (FC) provide an estimate of the percentage loans expected to default, based on historical data for each class of loan.  However, their loans are typically for small businesses and the failure rate, in my experience, may be higher than the FC prediction and recovery rates are relatively small because the majority of their loans are unsecured (ie not underwritten by a tangible asset such as property or land).

Secured Loans at 12%

I now avoid unsecured loans and prefer platforms such as Saving Stream and Money Thing.  Saving Stream loans are almost exclusively secured against property and land while Money Thing has a broader mix of assets that also include artworks and portfolios of goods such as electronics or jewellery.  Surprisingly these sites both offer annual interest of around 12% with no fees charged to the lender.   

Minimising Losses

My tip to minimise losses is to spread your money across as many loans as possible.  Another tip is to further diversify by lending through several PtPL platforms.  You should also assess the risk associated with individual loans.  For example, if property is to be developed, is the business case for the loan realistic based on current market conditions?

Accuracy of Valuation

Something important to consider is the accuracy of the valuation of the asset.  Platforms usually quote the Loan To Value (of the asset), abbreviated to LTV, as a percentage.  So, for example, a loan for £100,000 secured by an asset worth £200,000 would have an LTV of 50%.  The lower the LTV the less likely you are to lose money due to a default coupled with a poor valuation. 

Beware works of art where the estimated value may be optimistic depending on the state of the market and current fashions.  In the case of a default, the actual value of the asset must cover money owed to the platform, the lenders capital and interest as well as selling costs, legal fees, transport costs etc.

Evaluating PtPL Platforms

In my next post I’ll explore how we can evaluate the risk in individual PtPL platforms and identify how likely they are to have loans that default where the capital or interest owed are not fully recovered.

How to DO Peer to Peer Lending (PtPL) – Part 2

Practical Peer to Peer lending Advice

In my previous post  I gave tips on how to try PtPL with minimum risk.  I covered platforms such as Ratesetter (RS) and Funding Circle (FC).  In this post I shall look at Asset-based Lending on platforms such as Saving Stream (SS), Money Thing (MT) and Funding Secure (FS).  These offer far higher rates of interest with some (manageable) risk as well as making it relatively easy to get your capital back quickly via a Secondary Market.

These 3 asset-based PtPL sites reduce risk by securing each loan against a tangible asset such as property, art works, land, cars, planes or industrial machinery.  In the event of a default, the asset can be sold by the platform and the proceeds used to pay back the lenders.  The main risks are therefore platform failure or the asset valuation being too low.

These sites typically offer shorter loan terms than sites like Ratesetter.  Ratesetter’s best rate is over a term of 5 years and pays typically 5-6%. 

Saving Stream pays 12% for a bridging loan of typically 12 months.  In practice these loans may be redeemed earlier or continue for longer depending on progress of the development work required before the land or property is sold. 

In the current market, you can immediately sell loans without loss on the Saving Stream secondary market.  It is also worth noting that SS, MT and FS don’t charge any fees to lenders for buying or selling loans. 

While Saving Stream originally lent against boats, they now specialise in property and land.  Money Thing and Funding Secure offer a wider range of assets including cars and artworks.  More specialised sites, such as Ablrate, lend against aircraft, industrial plant and shipping containers with rates from around 10-14%.

It is obviously wise to spread your money across loans, asset types and platforms.  This minimises the risk of asset value collapse, platform failure or individual loan defaults.

Secondary markets are a useful means of further diversification for your existing loans and a channel to reinvest returned interest and capital on shorter term loans.

If you work full time then be aware that sites like Zopa and Ratesetter are relatively ‘hands off’ while the asset-based sites require more ‘hands on’ management.  You may also wish to look at the details of the individual asset-based loans, for example valuation reports, to make sure you are comfortable with the stated purpose of the loan.

So, finally, do give PtPL a shot.  Start with small amounts across several platforms and see how you get on.  But remember, don’t ever invest more than you can afford to lose.  Having said that, I think that you’ll find that PtPL is much less of a lottery than the stock market! 

How to actually DO Peer to Peer Lending – in a nutshell, PRACTICAL PtPL

Practical not Theory!

The financial press and social media are increasingly stuffed to the gills with hype about PtPL but most of it is so superficial.  You have probably seen some of the headlines: 

• ‘PtPL investment increasing by 200% per annum’
• ‘UK PtP is the fastest growth in PtPL per capita in the world’  

But 99% of this stuff is written by people who have never actually DONE it!  They have never signed up to even the simplest platform such as Zopa or Ratesetter and given it a try.

They therefore don’t really know what they are talking about.  Hopefully you have arrived here because you are an ordinary investor and you want to dip your toe in the water and actually have a go at PtPL.  Please note that this post relates specifically to the UK market but the principles are equally applicable to other countries.

STEP 1 

My advice is start with Ratesetter (relatively safe but uninspiring).  It only takes a few minutes to sign up.  It costs nothing.  Invest a small amount (minimum investment is £10).  You can put your cash in the 5 year market (interest around 6%) or shorter term markets where interest is less.  To start, I would recommend the monthly market that currently pays 2.8%. 

Beware the 5 year market as RS has relatively heavy penalties for early withdrawal.  As we will see later, other sites will offer 12% or more on a 6 month loan.  Many sites also have a secondary market so you can sell your loans instantly without penalty.

Sites like Ratesetter and Zopa lend to individuals rather than businesses.  Defaults are generally not a problem as they have a provision funds to cover this.  Hence the lower rates of interest offered. 

   

STEP 2

Next, sign up with Funding Circle (FC).  Funding circle is more interesting.  You bid for specific loans to businesses.  The down side is the risk of default – there is no provision fund but FC do provide an estimate of default rate, based on loan category (A+ through to E), based on their own historical data.

Most loans are unsecured so a default means you may lose some or all of your investment in that loan.  I now only invest in secured property loans on FC and leave the unsecured loans alone.  Loans secured against property mean you stand a good chance of getting all your cash back (assuming the valuation is accurate) once the property is sold.

Interest rates on FC have fallen somewhat and the chance to bid for your own rate has been removed.  A+ loans pay around 6.5% (after defaults) while E loans (highest risk) pay around 9%. 

     

Look out for Cashback on some larger A+ property loans.  I recently got a tasty 2% on a 6 month loan.  However, since the New Year, Cashback flow has dried up due to both a seasonal loan famine and increasing number of new borrowers hungry for fresh loans.

Unlike Ratesetter and Zopa, FC has a decent secondary market so you can normally get your cash out quickly, sometimes at a premium or, if you are desperate, at a discount.  

  

STEP 3

This is where PtPL gets more interesting (and more lucrative) via platforms such as Saving Stream, Money Thing and Funding Secure.  We are talking here about loans of 12-13% (with some manageable risk) for terms as short as 6 months (renewable) as well as the option to sell without loss on the secondary market.  Anyway, that's enough for now.  I’ll continue step 3 in my next post.

In the meantime, happy PtP Lending!  

UK Peer to Peer Lending – Is it really ‘Too Good to be True?’

Many self-proclaimed financial experts say Peer to Peer lending (PtPL) is flawed and full of risk.  Most of them are directly or indirectly employed by big banks or brokers and have an interest in maintaining the financial status quo.  But then this is no different to the doom-mongers who have been predicting a stock market crash every month since the great depression!

Here are some classic arguments:

     No Government Protection

The UK Government underwrites approved bank and building society SAVINGS via the Financial Services Compensation Scheme (FSCS).  This scheme clearly doesn’t extend to anything with risk whether stocks, shares, funds or peer to peer loans.

However, this doesn’t mean that government doesn’t like PtPL.  The Government regularly invests 10% in loans to small/medium UK businesses through platforms such as Funding Circle.  

The UK Government is also encouraging PtPL via it’s new third ISA, known as the Innovative Finance ISA.  There may be no government protection for PtPL but equally there has never been any state compensation for losses in any global stock market.

 Too Risky

Risk is relative.  Buying shares or funds is very risky.  I have a pharma fund that gained well over 10% in less than a year but where am I now? – a loss of around 10%! 

The risks in PtPL are much easier to quantify and you can also build a mixed portfolio to cover many of the risks.  So, for example, on each platform, you should spread your cash across a relatively large number of loans.  If the platform offers loans secured against a range of assets then mix the assets.  For example, with a platform like Money Thing you can spread the risk between several asset classes including fine art, railway memorabilia, land, property or super cars. 

In practice, while stocks and shares jump around in an almost totally unpredictable manner, PtP loans result in a fairly steady and predictable stream of interest. This makes PtPL an ideal regular income source.

     The Platform Might Fail

Do your own ‘due diligence’.  Check out the company, the backers and what other users think (Why not join the PtP Independent Forum?).  Examine the platform’s loan supply and their track record in terms of both defaults and recoveries.

 Too Many Defaults

Lower interest sites like ZOPA or Ratesetter (typically 5-6% over 5 years) have provision funds to cover defaults.  Other platforms such as Funding Circle (FC) have a projection for defaults that you can include in your own calculations. 

For example , the safest FC risk category is A+.  This typically pays around 8% interest.  FC charge a fee of 1% and estimate a 0.6% loss due to defaults.  The actual net projected interest in this example is therefore  6.4%.

Other sites, such as Saving Stream, Money Thing, Funding Secure and Assetz only offer secured loans against assets such as property.  This means that, provided the valuation is correct, you should eventually get all your money back, in the case of a default, once the asset is sold.  You can also check the platform track record in terms of defaults to estimate the risks.

A Final thought

 You don’t need to be a financial expert to do Peer to Peer Lending.  What you do need is some common sense and you should make sure that you never invest money you can’t afford to lose.  If I invest say £50,000 in PtP then I clearly need to make sure that I don’t put £25,000 on a single loan!  Ideally I should spread my investment across several platforms and make sure a good proportion of the total is invested at relatively low risk.

Yes Peer to Peer lending may, at first sight, seem too good to be true but my advice is to give it a try and see how it works out for you by taking out some trial small loans.  You might be pleasantly surprised.  

I would suggest PtPL is far less risky than the stock market and far more rewarding than a savings account, even without the government protection!

UK Peer to Peer Lending: Saving Stream – ‘Still Very liquid and Continuing to Deliver!’

What it Says on the Tin!

Saving Stream remains my favourite UK Peer to Peer Lending (PTPL) platform.  It reminds me of the product Ronseal with the simple slogan ‘Does what it says on the tin’.  Please note I have no financial interest in Saving Stream other than being a satisfied customer.

Saving Stream continue to deliver high value loans while keeping their platform simple.  They offer 12% interest across every loan with no fees whatsoever.  Also, no lender money has yet been lost due to defaults. 

Saving Stream (SS) don’t indulge it a lot of chat or debate with users but do appear to listen.  Each time there has been reasonable complaint, for example, via the P2P Independent Forum, they have acted in very short time period to modify their platform to fix the problem.

Pre-Funding Brilliance 

As a result they are the only PtPL platform to offer pre-funding; an arrangement where you can pre-bid for pipeline loans and then settle up AFTER the bid is accepted.  You can also, at the same time, buy or sell on the secondary market and again settle up the balance owed at a later date (ideally within 24 hours).

Bad Robots

More recently there was annoyance from SS users about numerous ‘bots’ (the actual number was never agreed!) that snaffled up every snippet of cash on the secondary market in the blink of a human eye, hence excluding flesh and blood buyers from competing.

The use of PtP robots, software programs that monitor a Peer to Peer Platform and operate on behalf of their human owner, are not limited to Saving Stream alone.  Funding Circle was awash with them, particularly in the days when the platform had variable rate loans and you could bid for your preferred rate.

Anyway, Saving Stream have now taken measures to greatly restrict the use of bots including the use of the ‘Captcha’ (software that differentiates humans from robots).

First Class Liquidity

The problem currently facing all platforms is that the increasing popularity of PtPL means there simply aren't enough big loans to go round, particularly in the quiet period after Christmas.  For this reason Saving Stream hardly ever have anything available to buy on the secondary market.  However, this means that, in the current climate, you can cash in all your loans in a period of a few minutes, ie total liquidity.  Not bad for 12% interest! 

UK Peer to Peer Lending - Innovative Finance ISAs (IFISA) and the way ahead

'IFFY' ISAs?

Some cynics are nicknaming the proposed government IFISA’s as ‘iffy’ ISAs and, considering that these products are due to launch by 6 April 2016 (only 3 months away), surprisingly little is yet known about them.

The creation of Innovative Finance ISAs is all part of the UK government’s enthusiasm for alternative finance in general and in particular, Peer to Peer Lending.  This is surprising as it often seems the Conservatives (the clue is in the name) favour the wealthy, big banks and other traditional fat-cat financial institutions.  

However, George Osborne has been a champion of peer to peer lending for some time (reflected in his budget statements) with the government lending up to 10% of the cash for selected small businesses loans through platforms such as Funding Circle.

The IFISA may also eventually include other alternative finance platforms such as crowd funding but it is assumed by many that this will come later once the PtPL option has been added to ISAs.

Meanwhile the big banks as well as big brokers such as H&L have, until recently, shown little enthusiasm for Peer to Peer Lending (PtPL).  (Do a search on their websites to see what I mean.)

'Boy' George Osborne Loves PtPLending?

What do we know?

So what do we know about the IFISA?  Currently you can invest up to £15240 maximum (tax free) in a cash ISA and/or stocks and shares ISA.  Unfortunately both have their problems.  Cash ISAs pay almost zero interest and shares are more likely to go down rather than up in the current financial climate.  In April 2016, The IFISA will offer a third alternative allowing the allowance to be used on PtPL.

What DON'T we know?

So what DON’T we know?  Well, quite a lot!  Apparently the government have not yet finalised the rules for IFISAs, even though their introduction is only months away!

We know that the major players such as Zopa, Ratesetter and Funding circle hope to have their own IFISA wrapper.  It also seems likely that other platforms such as Assetz  Capital and Saving Stream will also move towards the ISA provision.   We also know brokers like H&L also plan to have a wrapper.  It is not clear yet what platforms or products H&L will put in the wrapper and also how much they will charge for this service.

The general consensus from the informed lenders (the Independent Peer to Peer Lending Forum) is that the interest available from the IFISA will be less than that available on the non-ISA product.  If, for the sake of argument, an IFISA offered 5% or less interest, then more experienced PtP lender might well opt for a straight platform loan with, for example, Saving Stream (12% interest with asset security) and then pay any tax owed.

Other common PtPL questions include: 

Will the new IFISA allowance be limited to just one PtPL platform or broker in a year?

Can existing lenders transfer existing PtP loans into an IFISA wrapper?

Watch this space for further ‘iffy’ ISA developments – Anyway, all these unknowns do make me wonder just how many of these IFISA products will actually be available to tax payers in April 2016!