Peer-to-Peer Lending: My Experiences
I’m often asked to give more details on peer-to-peer lending which makes up just over 15% of my invested savings. Peer-to-peer lending is simply lending money to individuals directly instead of having a bank as a middle man. It has become increasing popular and I have been using this investment vehicle since May 2006 when I first joined one of the biggest peer-to-peer platforms, Zopa. Fairly recently I added a new platform to my portfolio: CrowdProperty. This is a lending platform for property developers. Below I will give my experience and thoughts on these two lending platforms from the perspective of a lender.
This is one of the first peer-to-peer lending companies in the UK having started in 2005. I joined in May 2006 and as a consequence I receive an extra 0.5% interest on all loans I make on the platform in the form of an “early adopter” bonus. This is where over 80% of my peer-to-peer lending currently takes place. At present I receive about 4.6% (including 0.5% bonus) interest on my loans. The site currently has 3 types of loans for the lender to make: Access, Classic and Plus. Personally I only use the Access and Classic options.
Access currently pays about 2.9% and as the name suggests gives the lender easy access to their money at anytime. To get back your money the loan needs to be sold to another lender and in the Access account this is free to do. The Access option is also covered by something called Safeguard which is a fund held at Zopa to cover bad debts making your investment safer. The Safeguard feature is not 100% guaranteed should loan default rates become excessive.
Classic is closer to the original Zopa type loans. Access to your money is more restrictive than the Access account and you must pay a 1% fee if you wish to sell your loan back to the exchange. The current rate on this is 3.7% and the Safeguard feature is included in this product.
The final option is Plus. This is a higher risk option lending money to borrowers with lower credit scores. The interest rate here is currently estimated at 6.1% after bad debt. The Plus account is not covered by Safeguard and the 1% early withdrawal fee is also applicable. Personally I don’t use this option as I think the risks are too high for the given interest rate.
Interest rates at Zopa have been falling for many years. When I first started lending on the platform rates in the 8%-16% (excluding bad debt) were not uncommon. Initially lenders set their own rates with guidance from Zopa on estimated bad debt levels. You could ask up to 20% interest (and sometimes in the C market you would get filled!) but to get money lent quicker you usually had to be close to the Zone Of Possible Agreement, or ZOPA. Since then Zopa have been continually trying to simplify the platform to attract more lenders at the cost of lower rates for the more financially savvy early adopters.
In the future Zopa is aiming to become a bank, which is great for the management/shareholders but not such good news for the lenders. Rates will invariably continue to decrease especially with investors chasing ever smaller returns.
A fairly new addition to my peer-to-peer lending portfolio. Crowd Property is a lending platform for property developers to receive short term loans to fund property projects around the UK. The loans tend to be 12-18 months in duration compared to 3-5 years on Zopa. Interest rates are much higher and currently set at 8%. I made my first loan in March 2016 and have made a total of 7 loans on the platform. Minimum loan size is £500 which is much higher than Zopa which typically matches loans at the £10 level. Lenders get first legal charge on the property should the development come into difficulties. So far no loans have defaulted and borrowers tend to be experienced property developers.
At present the site and the community around it is fairly small. I’ve been fairly cautious with my lending there but I think the strict vetting process and the first charge on the properties means the risks are kept to a minimum. Recently new projects on the platform have been subscribed very quickly. In the beginning it would take months to fill a loan, the last few loans have been filled in 2 or 3 days. This could be due to lenders having returned funds ready to invest and also increased confidence in the site. Initially some projects paid 10% so future interest rates look likely to fall as the site becomes more popular.
So there you have it. I haven’t tried any of the other lending platforms such as Funding Circle or Ratesetter, mainly out of laziness so these might be an option for the future. With Zopa I think I will gradually lower my exposure, especially given the falling rates, although my 0.5% bonus does make the Access option fairly attractive. With CrowdProperty I am becoming more confident and the 8% return is very attractive so it looks likely I will increase my exposure here. Possibly from the current 2% of my net worth to a target of maybe 5%, although this will depend on the number of new projects on the platform as I prefer to spread my capital over several projects rather than risking it all on just 1 or 2.
The future of peer-to-peer lending looks fairly bleak with falling rates as this type of investment vehicle becomes ever more popular. With many platforms getting access to SIPP and ISA accounts it looks like more and more money could be flowing into these types of investments in the years to come. Maybe buying shares in the companies might be the way to go.
With the additional money in these vehicles the rates are getting to the point where they no longer compensate for the risks. With Zopa they look like they are very close already. Future increases in interest rates could leave lenders with low interest loans on their books that they are unable to sell back to the exchange. So overall I think the returns can be good but remain cautious in this area.