Peer to peer lending - Zopa, RateSetter, FundingCircle etc

blizeH

Hi,

I'm looking to invest in peer to peer lending (I quite like the ethics behind it, and of course getting a fantastic interest rate is a huge bonus) but it's hard to chose between the two.

I have a very small amount in both Zopa and FundingCircle right now, but my Zopa returns are only half my FC returns - but this could be simply because I haven't done a full year yet and over the course of the entire term (however long that may be) maybe Zopa would give a better return?

It's hard to chose between the sites, and RateSetter looks to be a great option too - a smaller return but a much lower risk.

Any opinions or advice would be much appreciated, thank you!

psychic_teabag

The relative returns between zopa and ratesetter depend on your tax rate (because of the way bad debt is handled). With ratesetter's model (if it works) you can get money loaned out faster because you don't have spread the money out £10 out a time.

There's a rate comparison thingy at http://www.p2pmoney.co.uk/compare/index.htm

EDIT: I think ratesetter is currently offering a higher return than zopa - their headline numbers are after fees and bad debt, whereas for zopa they are before all those.

blizeH

Wow, that link is incredibly eye opening - thank you!

Seems like the one I disregarded because of the low rates (RateSetter) is actually by far the best option of the three - 5.28% is far better than I'd get in a savings account too. Thank you again, really appreciate it.

psychic_teabag

I'm not sure where that site is getting its Zopa headline rates from - they say 7.2% for the A*60 market, but right now it should be easy to get 8% or more. (before fees and bad debt)

Ah - http://uk.zopa.com/lending/great-returns shows the rate over the last year as 7.2%. It's been low for most of last year, but has picked up a bit since the start of this year.

jamesd

It's using the average loan size. That's pretty small so the rate required to be included in the loan is quite low. It shows the headline rate for A*60 as 8%. Then there's a 1% fee to deduct, taking it to 7%. Then the effect of tax on bad debt if it happens at the anticipated 0.4% rate takes it to 6.5% effective gross rate for a basic rate tax payer or 6.33% for higher rate (because you pay tax on bad debt).

It is possible to get higher rates at Zopa if you time things carefully, though for most of last year that wasn't really particularly viable at interesting rates. At a few times this year I've been able to lend to A*60 at rates from 8.9% before fees and bad debt, the highest being 10.8%. Average of 9.2% or so. Too soon to say whether we'll see a repeat of any of those rates, they aren't available today.

Do take care when comparing these peer lenders to savings accounts rates. The peer lending is an investment product, not a savings product, so your capital is at risk. You also don't get FSCS protection. The effect of this and underwriting and other risks is to make these high risk investment products, while savings accounts are very low risk. That risk premium is why rates are above savings account rates, they need to be to compensate for the risk and uncertainty.

Other investment options that can pay out more, with capital variations that are both up and down instead of down only, are in a list at Trustnet, sorted by yield (roughly, interest). These can be held with no tax personal income tax deduction within a stocks and shares ISA, including the ones that are using bonds, not shares. Invesco Perpetual Monthly Income Plus paying 6.6% interest and Newton Higher Income paying 6.4% distribution are two of the commonly suggested funds from that list. Artemis High Income paying 7.15% is also often recommended. Be sure that you look at the charts to see the sort of capital value variation that must be expected from these, they go up and down routinely.

For peer lending as for market investing in general, market timing can make a big difference to results. Don't jump in just because it's there, except with enough to learn how things work. Save the bigger money for times when conditions are favourable and don't hesitate to take money out when they aren't.

Do remember that peer lending companies are businesses. I expect Zopas to be getting something like 40+% of the total cost of credit paid by a borrower on median loan size in the 60 month markets at median loan size. Variable from 20% or so up for the 36 month market depending on loan size. Some of its competitors are getting even more of the money the borrower is paying. I like the peer lending, just don't go in expecting altruism from the middle men who run them, they are out to make a profit just like the banks but unlike the banks they don't bear the risk of loss.

Declaration of interest: I've a repaid loan via Zopa and lending offers, though I don't expect any of them to be matched at present.

easteregg_2

psychic_teabag wrote: »

I'm not sure where that site is getting its Zopa headline rates from - they say 7.2% for the A*60 market, but right now it should be easy to get 8% or more. (before fees and bad debt)

Ah - http://uk.zopa.com/lending/great-returns shows the rate over the last year as 7.2%. It's been low for most of last year, but has picked up a bit since the start of this year.

I should start by saying I run the p2pmoney website. One of the reasons why this started was to highlight that while there are different rates on offer, the highest headline rate isn't actually the best, due to fees, taxation and bad debt provision.

The site does also state that it is possible to get higher rates on platforms such as Zopa, but the rates published are the highest rate a lender could achieve if they participated in all loans.

The data is near real-time and is updated every hour from the data from each of the P2P companies.

blizeH

Been keeping an eye on the comparison site, seems like if you want to keep your money in long term then RateSetter is the way to go, otherwise FundingCircle for more flexible short term loans.

Zopa doesn't seem particularly competitive at all...

jamesd

None of them is currently really competitive with standard investments inside a S&S ISA at the moment, where 7%+ tax free interest and dividends after all costs can be obtained from quite popular fund choices. Even very popular ones like Invesco Perpetual High Income beat most of the currently available P2P rates.

Don't under-rate Zopa based on rates alone. While its risk director recently changed, it has the longest-running underwriting practice and that can help to keep the level of risk better understood than for newer players.

Timing matters a lot at these places, as with investing in general. I was doing some lending at 8.9-9.9% before fees and bad debt at Zopa's A*60 market at some times earlier this year, after a couple of years of effectively nothing. Those rates aren't available there at the moment.

Declaration of interest: I've borrowed and lent via Zopa but currently have no offers there and don't expect this to change in the near future.

Biggles

It's now known as encash and they've recently cut the lending rates to such an extent that none of the loans I've bid for lately has been sufficiently funded. Looks like the cut was a massive mistake and very few loans seem to have actually been completed this year; they have said they are increasing them again, but only slightly and lenders seem to be taking their money out.

MiloS_2

It seems like peer to peer lending is becoming an increasingly popular investment option so I wouldn't be surprised to see many similar businesses launch within the next 6 months.

I know of one new company launching soon, which is FundingKnight and their rates seem worth investigation. The minimum investment is £250.

I've found some useful information about the p2p lending community on their blog too, which specifically profiles the likes of Zopa and FundingCircle.

codetown

Biggles wrote: »

It's now known as encash and they've recently cut the lending rates to such an extent that none of the loans I've bid for lately has been sufficiently funded. Looks like the cut was a massive mistake and very few loans seem to have actually been completed this year; they have said they are increasing them again, but only slightly and lenders seem to be taking their money out.

Just a suggestion to everyone.
Stay away from Yes-Secure/Encash (encash is just a rebranding of the previous yes-secure company)!

They have MASSIVE default rates (over 10x the competitors) as they are totally incompetent and cannot run the loan collections in any decent manner. Also they send out and publish FALSE ADVERTISING, in which they claim default rates of 3%, while in reality these are around 20% if you consider the real defaults (they don't call default a lon even when it is 9 months late!!!!!).

A far more professional offer is RateSetter, which with its Provision Fund has resolved (for the moment) the problem of Bad Debt!!