Peer to peer lending - Zopa, RateSetter, FundingCircle etc

JohnRo

Having spoken to their CEO a few times and emailed them several more times I think Ratesetters concern, if any, will be that the business continues to grow in a sustainable way for a long term future. They'll do whatever they need to do in order to keep it on an even keel and if that means people taking unmatched money elsewhere then I'd imagine "so be it" is their attitude.

The wonderful thing about markets that aren't being manipulated is that they will eventually find their own level.

grey_gym_sock

well, one group of risks is basically everything other than lender risk, including fraud or major administrative errors by a p2p company or its employees or anybody else they rely on. the issue is the absence of FSCS protection to cover this kind of thing. it's perhaps not a big risk if they're well-run organizations, but most of them have not been around for very long. you need to make a judgment about whether each one is well run.

lender risk can partly be managed by careful underwriting. but it is also affected by changes in the wider economy. if the depression deepens, defaults will go up generally, however careful they have been.

it does sound like market forces are driving rates down. i only suspect that a lot of lenders are underestimating the risks.

jamesd

I've just updated this elsewhere for someone who wanted income, so for those interested in alternatives to P2P some funds that might be used and their yields include:

10.26% Marlborough High Yield Fixed Interest (pays quarterly)*
7.94% Newton Global High Yield Bond (pays monthly)*
7.10% Artemis High Income (pays quarterly)*
6.73%% Invesco Perpetual Monthly Income Plus (pays monthly)*
6.11% Invesco Perpetual Distribution (pays monthly)*
5.64% Newton Higher Income (pays quarterly)
3.79% Invesco Perpetual High Income (biannual)

Those yields are not guaranteed. The capital value varies, by as much as 40% in some of them. You'd use many different funds, not just one. Don't jut pick one high yield fund! Do look at the charts to see how the capital value can vary. The ones with a * should be first priority to go into a stocks and shares ISA because they pay out as interest and that won't be taxed if they are doing it inside an ISA.

JohnRo

grey_gym_sock wrote: »

it does sound like market forces are driving rates down. i only suspect that a lot of lenders are underestimating the risks.

RateSetter got me 3.3% for rolling monthly money matched today on the 20th.

I have a few K in a Santander Esaver Issue 5 so the Ratesetter contracts look like getting transferred when they're up next week unless I see a couple or three tenths rise in the rate.

premierfella

Interesting thread - what amazes me about the current Ratesetter monthly market is the amount of money left sitting at 4% plus - which presumably Ratesetter are gratefully creaming a few tenths of a percent on for the forseeable future! Are there really that many people who forget to check back in and amend the rate or withdraw?

badger09

grey_gym_sock wrote: »

well, one group of risks is basically everything other than lender risk, including fraud or major administrative errors by a p2p company or its employees or anybody else they rely on. the issue is the absence of FSCS protection to cover this kind of thing. it's perhaps not a big risk if they're well-run organizations, but most of them have not been around for very long. you need to make a judgment about whether each one is well run.

lender risk can partly be managed by careful underwriting. but it is also affected by changes in the wider economy. if the depression deepens, defaults will go up generally, however careful they have been.

it does sound like market forces are driving rates down. i only suspect that a lot of lenders are underestimating the risks.

A pretty good summary.

I've been a lender with ZOPA since November 2006, so not exactly a trailblazer, but certainly an early adopter I have no issues with the way it is run and admin errors have been dealt with very quickly - certainly improved since the very early days.

2008 was an awful year for many lenders and ZOPA subsequently tightened its underwriting. However, largely due I think to new lenders underestimating risk and not understanding the tax implications of bad debts :eek:, rates have fallen well below my own acceptable levels. I have made very few loans this year and have been steadily withdrawing funds as repayments are made.

It used to be great fun though and I do miss the camaraderie of fellow Zopaholics :beer:

pqrdef

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%?!

It's not similar. £1700 is a lot more interest than £1120, it's half as much again. So you're looking at around 5.4%pa overall.

That may not too shabby for a 3-year fixed-term bond equivalent, depending on your perception of risk.

But this all assumes that you need all your money back 37 months from today, which may be an artificial scenario. Of all the things the RateSetter 3-year market might compete with, the 3-year bond is where it's most at a disadvantage.

To get the best from the 3-year market, you have to keep reinvesting the repayments in the same market. It's more like a notice account than a fixed-term account.

Then, to get all your money out on a fixed date, you need 3 years' notice, and you take what is effectively a closure penalty of about 8 months' interest, because the money dribbles out before you need it.

How much this penalty hurts depends on how long you've been making 6.8%pa. The longer the better. Liquidity costs, and lenders typically like to be more liquid than their borrowers. But the longer you're in, the closer your rate of return converges towards that 6.8%pa.

But the all-out-on-a-fixed-date scenario may still be artificial. For many people, a more realistic scenario is that they plan to reinvest income so long as they don't need it, but when they start to need it, they'll just start spending it. Then they don't have to dilute their rate of return by padding out the time with lower-rate short-term investments.

So the market works well either as a long-term accumulator or as a rapid generator of income from capital. Best, it can do both together. This can work very nicely if you've got an irregular income or irregular expenses. A £10K pot in RateSetter makes available £300 a month that you can reinvest, or take out and replenish later, so within that limit it's almost like an instant-access account, paying 6.8%pa.

Or then again, you can use it to drip-feed an 8% regular saver from a lump sum. Or a regular investment scheme with your stockbroker, if you're buying shares and you're into pound cost averaging. Or any regular payment that you want to meet from a lump sum. It might even be possible to stooze it. Many scenarios where the monthly repayment model is a natural fit so the dilution problem is avoided - and the only competition from the banks that fits the same need is 3.2% instant access.

This is so good, I'm going to have to go and put some more in.

JohnRo

pqrdef wrote: »

This is so good, I'm going to have to go and put some more in.

As described elsewhere though, you're then into the realm of investing for many years and needing to give what amounts to 3 years notice on account closure to get all the money out. Along with loss of interest amounting to many months worth, at a relatively poor rate, during that closure period. There are a great many better investment alternatives available as suggested by jamesd that can be held within an ISA where both the income, overall risk and terms of withdrawal are far superior.

jamesd

badger09 wrote: »

It used to be great fun though and I do miss the camaraderie of fellow Zopaholics :beer:

There are a fair number of us over here, though like you these days it's mostly withdrawing and occasional lending when conditions are favourable for me. Did a fair bit early this year though would have been happy with five times as much as I did if conditions had favoured it.

badger09

jamesd wrote: »

There are a fair number of us over here, though like you these days it's mostly withdrawing and occasional lending when conditions are favourable for me. Did a fair bit early this year though would have been happy with five times as much as I did if conditions had favoured it.

I know. But we don't all use the same name on both discussion boards :rotfl: