Peer to peer lending - Zopa, RateSetter, FundingCircle etc

psychic_teabag

JohnRo wrote: »

It's a balancing act. RateSetter has very low rates compared to others, I also suspect many of those making contracts with RateSetter for the 3 and 5 year markets don't appreciate the effect amortisation is having on the returns from the percentage rate seen in those markets.

Could you elaborate on this amortisation effect ?

That said I use them for rolling monthly market contracts since it currently beats the banks hands down and doesn't tie up the capital and interest earned for more than a month at a time.

There seems to be quite a lot of money available on the monthly market. Time spent in the queue waiting for a loan has a relatively large effect on the overall rate for monthly. e.g. if it takes a week to go out, you only get 4/5 of the headline rate. In that case would need to get 4% from ratesetter to even match best instant-access savings account.

JohnRo

psychic_teabag wrote: »

Could you elaborate on this amortisation effect ?

In what way should I elaborate? I'm sure you know what amortisation is and how it works?

I just suspect people see the 6% ~ 7% rates on RateSetter and don't realise that being repaid as an amortising loan they will only see returns of around 3% AER (gross) which after tax is a terrible return. I have the numbers in a spread sheet I made to compare and contrast various options and decided it just wasn't worth it at the rates they're matching. When looking at some of the rates people are prepared to lend at over the 3 and 5 year markets I couldn't help but wonder if they understood the effect of that rate on their return.

psychic_teabag wrote: »

There seems to be quite a lot of money available on the monthly market. Time spent in the queue waiting for a loan has a relatively large effect on the overall rate for monthly. e.g. if it takes a week to go out, you only get 4/5 of the headline rate. In that case would need to get 4% from ratesetter to even match best instant-access savings account.

Yes, I agree. They are going to have to do something about it sooner or later. Their vetting of borrowers has been good for provision fund growth but not so good for growing the market they facilitate. It might get to the stage where they need to start taking on a little more risk and have the provision fund cover more bad debt and do a bit more of what it was designed to do.

I'd worked out the loss of interest on unmatched money in a holding account is around 9p a day per £1000 ( that was when average rates were around 4.2% gross )

whereas holding out for 0.1% extra interest gained only around a fifth of a penny per day so there was never going to be a rate worth holding out for, it is more important the money is matched quickly at market rate. It seems many on the site don't share that view

All my matches are for money that was already in the market, but I have quite recently deposited some new money and it took about 2 days from memory. Money being reinvested has so far been done without any breaks so it has been earning interest constantly, at market rate, which for me this last month been 3.9 ~ 4.0%. I have 11 or so contracts at the moment, the next one of those due to roll is on the 20th so will see then what the rate has dropped to this month.

I'd describe RateSetter as the least rewarding and least risky p2p market.

psychic_teabag

JohnRo wrote: »

In what way should I elaborate? I'm sure you know what amortisation is and how it works?

I just suspect people see the 6% ~ 7% rates on RateSetter and don't realise that being repaid as an amortising loan they will only see returns of around 3% AER (gross) which after tax is a terrible return. I have the numbers in a spread sheet I made to compare and contrast various options and decided it just wasn't worth it at the rates they're matching. When looking at some of the rates people are prepared to lend at over the 3 and 5 year markets I couldn't help but wonder if they understood the effect of that rate on their return.

Well, I'm hoping I understand the situation...

This sounds like the same story as some people give for regular-saver accounts. I'd argue that I'm getting the full 6-7% on every penny, but the amount on loan, and therefore the amount of interest, is reducing over time.

Because I'm getting some of my capital back, I can re-lend that to get the same rate. I'd have to leave it sat earning 0% for the remainder of the loan period in order for the average rate to be 3%.

JohnRo

There's no dispute the return is higher. Let's say for the sake of argument, you match £10,000 on RateSetters 3 year amortising loan market at 6.8%. You get the percentage you see so all of that 6.8% (gross)

That will return a total of £11,082.83 (before tax) over the course of 36 months at a rate of £307.86 each month. You then reinvest that sum each month in the rolling market. (Let's assume there is no delay in getting any of these amounts matched.)

Investing £307.86 each month in the monthly market at 3.6% will return £11,700 (before tax) by month 37 (the last payment has rolled once in the monthly market.)

So £10,000 returns £11,700 (before tax) after 3 years and one month, but during this time the bulk of that money is locked down.

Compare that to the rolling monthly at the same 3.6% rate, maximum lock in period 30 days or near as dammit. The whole of the sum can benefit from any rises, it can also lose to any falls of course but isn't locked in so can be moved elsewhere if that scenario arises.

£10,000 matched at 3.6% (gross) in the rolling monthly market returns £11,120 (before tax) at month 36. A shortfall of ~ £460 (after basic tax).

However are interest rates likely to fall or rise?

My decision in the end was that 30 day accessibility and likelihood of interest rate rises plus leaving the option open to grab any attractive opportunities elsewhere, made it a close call and I chose the flexibility in the end.

blizeH

Thank you for the explanation, but I feel I'm missing something... assuming your money is instantly reinvested as you suggested, how can 3.6% give a similar return to 6.8%?!

Using some (very rudimentary) calculations from the Motley Fool site, as far as I can see with a 3.6% account pre-tax you'd have £11,119 after 3 years, but at 6.8% you'd have £12,182 - almost double, as you'd expect from the difference in interest rates

psychic_teabag

blizeH wrote: »

Thank you for the explanation, but I feel I'm missing something... assuming your money is instantly reinvested as you suggested, how can 3.6% give a similar return to 6.8%?!

Using some (very rudimentary) calculations from the Motley Fool site, as far as I can see with a 3.6% account pre-tax you'd have £11,119 after 3 years, but at 6.8% you'd have £12,182 - almost double, as you'd expect from the difference in interest rates

Yeah, 10,000 for 3 years at 6.8% compound would give 12,182. But to get that, you'd have to reinvest the repayments back at 6.8% and so for another 3 years. ie after 3 years you would have £12,182, but (almost) all fully loaned out again.

If you actually want to withdraw it after 3 years, JohnRo's is modelling reinvesting the repayments back into monthly, rather than 3 years at 6.8%. To a first approximation, you'd get the average rate 5.2% for 3 years, which is 11,642 - not too far off JR's 11,700. You could also reinvest back into 1-year system during the first couple of years, but then the sums get more complicated still.

3 years at 3.6% compounded is 11,119. (But if rates go up over the next 3 years, this approach would benefit more than the others.)

blizeH

Ah, I see now, thank you.

I guess that's a problem with any of these sites - you get a good rate, but there is definitely more hassle involved, particularly with the way your money isn't simply returned as a nice lump sum at the end of the term.

I have some money split between Zopa, FundingCircle and RateSetter (my indecisiveness meant I wanted to try all of them) but am thinking of slowly taking the money from them and investing elsewhere to be honest. This in itself is a pain in the backside, constantly having to withdraw on a regular basis - think I'll go the route mentioned above of setting it to re-invest on a rolling basis. Thank you

grey_gym_sock

if 3.6% is the rolling rate on ratesetter, i am really struggling to see why ppl prefer that to about 3.2% in a savings account. however well ratesetter may be run, there are significantly higher risks, and 0.4% is a tiny risk premium.

JohnRo

grey_gym_sock wrote: »

if 3.6% is the rolling rate on ratesetter, i am really struggling to see why ppl prefer that to about 3.2% in a savings account. however well ratesetter may be run, there are significantly higher risks, and 0.4% is a tiny risk premium.

I chose 3.6% simply because for this month that seems to be where the market is, all the money I have matched currently is rolling at between 3.9 and 4.0

I'm not sure the risk really is all that great personally, ultimately it will be determined by how well RateSetters borrowers are vetted. I tested this and even though I have over 10K loaned on there I failed to jump the hurdle for obtain a loan with them.

At the end of the day it's the people making the market who determine the risk and base the interest rate reward they want to see on that.

Psychic Teabag made the point that a glut of lender money is going a long way towards driving rates down at the moment as people compete to get matched, if they can balance the supply with more demand while keeping a handle on the risk profile then I'd expect rates to begin climbing again.

blizeH

Yeah, I guess it doesn't help that these sites often seem to market themselves more at lenders rather than borrowers. Maybe lenders/savers are more likely to look around too, whereas most people I know who have loans will just go with whoever they have their current account with. (speaking purely from personal experience)

(edit) the current monthly rate on RateSetter has dropped even further, down to just 3.5% now.