Peer-to-peer lending and saving: Making everyone happy

amcluesent

Funding Circle gives savers interest of up to 9% and small businesses cheap loans. But what are the risks of peer-to-peer lending over the internet?

Small businesses are starved of loans from Britain's cash-strapped banks and savers are receiving miserable interest rates on their deposits. How about bringing them together on the internet and cutting out the banks, so that businesses find loans and savers earn better interest rates? That's the idea behind the launch this week of a venture called Funding Circle.

It's not an entirely new concept: Zopa.com links up individual savers with individual borrowers. But this is the first time the peer-to-peer lending model has included small businesses. Savers will earn interest of between 6% and 9%, while business borrowers will pay between 8% and 11%.

There is no access to the Financial Services Compensation Scheme, so in theory you could lose all your money.

FATBALLZ

I am starting a small business manufacturing hydraulic turtle shell polishers, please lend me £50k and you will definitely get a massive 9% return on the risk when I am making millions.

Jonbvn

I posted a query about this a few weeks back.
https://forums.moneysavingexpert.com/discussion/2659053

Not a great deal of feed-back on that thread. I have lent a small amount as a trial to see how things work out. Too early to draw any conclusions. However, some things I do like (ATM):

2% cash-back from FC.
The ability to sell your loans on to other lenders, if you want to cash-out.

I also lend on ZOPA. However, the 2% cash-back is making me consider switching money to FC, when it becomes available.

The real unanswered question, is how small businesses loans compare to personal loans wrt defaults.

Important to undertstand that this is not equivalent to saving. IMPO, it is more akin to buying junk bonds.

Jonbvn

FATBALLZ wrote: »

I am starting a small business manufacturing hydraulic turtle shell polishers, please lend me £50k and you will definitely get a massive 9% return on the risk when I am making millions.

That's called business?

BTW, FC check out the borrowers reasonably thoroughly before allowing them to submit load requests. How well this vetting is done will only be revealed over time. Don't put your house on this.

Gorgeous_George

I'm sure there were doubts when Zopa first started. Today they lend £1.5M per week. Still small beer in the personal loan stakes but huge progress from a standing start.

I like Funding Circle and I'm sure it will still be around in ten years time. It is clearly not in FC's interest to let their lenders down with defaulting loans. However, I am hesitant when it comes to investing my money - at Zopa I limit my lending on Listings to 5%; I'll limit lending on FC to a similar sum and at £20 per business.

I would expect personal loans to be less risky than loans to businesses - especially with the mother of all recessions about to be engineered by the Condems.

GG

xrjtg

I'm glad this was flagged up: I've finally got round to lending on Zopa, and it's nice to see expansions of the theme.

I'm not sure I'll pile in just yet, as Zopa currently offer higher rates and a longer history, but I'll keep an eye on it. The secondary market in particular could be interesting, although it seems fairly limited at the moment, with loans only tradeable at book value.

Procrastinator333

Thanks for this, looks very interesting. It was always the lack of an option for cashing in early that made me not use Zopa, so very keen on this.

Like someone else has commented, hopefully they will let you set the price that you sell for at some point.

I have signed up and put a £100 in to have a play with. All looks very good to me so far. Hopefully they will add a forum on to the end of it too.

I also like the fact Jon Moulton is behind it. Always been impressed when I have heard him speak.

Soa big :T , :j and even a :beer: from me.

property.advert

Jonbvn wrote: »

Important to undertstand that this is not equivalent to saving. IMPO, it is more akin to buying junk bonds.

And you wouldn't buy junk bonds with these paltry coupons nor yields to maturity would you ?

Jonbvn

Gorgeous_George wrote: »

I'm sure there were doubts when Zopa first started. Today they lend £1.5M per week. Still small beer in the personal loan stakes but huge progress from a standing start.

I would expect personal loans to be less risky than loans to businesses - especially with the mother of all recessions about to be engineered by the Condems.

IMHO, if ZOPA don't introduce a secondary market then in a few years FC could overtake them. This is an important distinction between the two platforms.

I can’t agree about personal loans vs. business loans. The Condems will be laying waste to the public sector. Generally, this is likely to adversely impact jobs and hence personal loans more than private companies.

xrjtg wrote: »

I'm not sure I'll pile in just yet, as Zopa currently offer higher rates and a longer history, but I'll keep an eye on it.

With FC offering 2% cash back, I think their rates are probably better ATM.

property.advert wrote: »

And you wouldn't buy junk bonds with these paltry coupons nor yields to maturity would you ?

Tell me where I can get a 8%+ return then? I don’t agree that the coupon is paltry.

xrjtg

Jonbvn wrote: »

With FC offering 2% cash back, I think their rates are probably better ATM.

I'm hovering just above 8% expected return on Zopa. The lowest risk loans on FC have rates of about 8.2%, with an expected default rate of 0.6%. So it's close, and might match Zopa if I can get in at the high end. So on those grounds perhaps it is worth dripping in a few hundred pounds to see how it goes.

If their expected default rates prove to be accurate then it doesn't matter how anyone feels in their gut about the relative risks.

EDIT: Perhaps the mysterious "cashback" will affect things. For some reason they don't want to explain unless you're logged in, so it looks like I will be signing up just out curiousity. I'll post the terms here later if I manage to find them out before anyone else has.

edinburgher

IMHO, if ZOPA don't introduce a secondary market then in a few years FC could overtake them. This is an important distinction between the two platforms.

I completely agree and I'm sure Zopa have noted this with interest.