How safe is Funding Circle?

mortgagenoob wrote: »

I am currently trying to decide what best to do with my savings to beat inflation without tying it all up for many years. I have come across Funding Circle and put in £10K to start off with, the returns look great at 7.5% and I would like to put in the rest (about £240K) but I'm not sure I understand the risks properly, would I be foolish to put that amount in?

As above, the short answer is yes, but I'd suggest you need to look at the bigger picture regarding assets and objectives - you must have some non-obvious reason for wanting to keep quarter of a million quid in easily-accessible cash form, are you imminently looking to buy/build a property perhaps?

Like the OP I have recently lent £10k through Funding Circle with a view to lending more once I better understand the system and the risks, although it is unlikely that I would be lending as much as £240k. I started about a month ago and it has taken that month to get all my 10k lent, but allowing for there being no return on the money that is waiting to be lent the accrued interest I have made is roughly in line with my expectations and the predictions given on the website.

One of my main concerns at the moment is how quickly one could take out money in the event of even a modest economic downturn. If you want to withdraw money quickly you use an automated selling process to sell your loan parts to other lenders who wish to increase their lending. At the moment there is a queu of would-be lenders all waiting a few weeks for borrowers to take their money so I imagine that if I wanted to take my money out quickly at the present time my loan parts would be almost immediately purchased by those would-be lenders - no problem at the present time.

My understanding is that during the period since Funding Circle started it has produced steady returns for lenders, a graph on the website shows that the returns have roughly matched the FTSE100 but without any of the volatility associated with equity investments. So, considering that it has been a good period for the FTSE100, Funding Circle looks very attractive to new lenders, myself included, so perhaps it is not surprising that there is a queu of would-be lenders today. However, what would happen if there was even a fairly moderate economic downturn that resulted in some increase in the number of borrowing companies that go bankrupt? Suppose that caused a significant number of lenders to panic and want their money out - would that not quickly turn a queu of would-be lenders into a quey of lenders all wanting out? Would that make an exit by selling loan parts to other investors almost impossible?

There is of course another way to take your money out of Funding Circle, you can turn off reinvesting and wait till all your loans come to termination, that would give you a return of capital plus interest, over a period of about five years, that being the duration of the longest loans made through Funding Circle. If this happens during an economic downturn you could expect a higher than normal proportion of your borrowers going bust but unless the downturn is really catastrophic I would have thought you would at least get your money back, but you would have to wait a few years to do so, a quick exit might not be possible.

I really am ignorant about money, so I would be grateful if people could tell me if the above concern is justified or if I am misunderstanding the way that P2P lending works.

I would see it is a massive risk - putting almost all of life savings there. Of course apologies for an assumption if you have another three quarters of a million rattling in your coffers.

P2P lending is risky.
If the lendee fails to repay, it can take ages for funds to be recovered and you may lose capital.
If the platform goes bust, getting your funds back may be a lengthy and torturous process!

I limit my exposure to less than 10% of portfolio and that is spread over half a dozen platforms.

I'm quite new to Funding Circle and just put £1k in to test the water - so far so good.

I don't quite understand the bit about selling loans to other lenders. I'm looking to invest a bit more. Can I "buy" someone else's loan - is that a good way to do it, instead of just investing more directly myself please?

Also, just confirming my assumption here is that you can't invest say £5k for 1 year or 2 years? You get what you're given in terms of the length of the loan, is that right? And you have to wait (or sell it) if you want your money out?

Thanks in advance for any assistance.