Believe it or not, this is the article which started this some 11 months ago. When Chris, Dave and I sat down together at the pub to talk about the idea of a finance blog, I brought this “post” with me as an idea – it has been sitting in a drawer ever since, but now, while the other two aren’t looking I’m getting it out there.
Below is the untouched, unadulterated article as I wrote it back then. The numbers have changed only slightly as at the time of writing I had to wind down all my Peer-2-Peer (P2P) accounts as much as I didn’t want to, but having just finished doing some refurbishment to my house, I had some serious bills to pay.
The Glorious Article
Thanks to frankly dreadful returns on traditional bank and building society savings accounts, I have been using Peer-to-Peer lending as a means to boost returns for a number of years.
I won’t pretend it has been plain sailing; over the years I have seen the business models of the lenders change and have also had to deal with plenty of defaults.
Dipping my toe in
What started as quite a revolutionary means of lending and borrowing has become a little more conservative; there is also less lender interaction than there was in the past. When I first started lending with Zopa (Z), there was a choice of automatically lending at your accepted risk level, i.e. you could aim for a higher return through lending to higher risk borrowers; with this came a higher risk of default. The second option (which was my preferred method) was essentially an auction. The lender would make their pitch (what they wanted the money for, why they were a good risk etc) and then prospective lenders would bid to loan the money. For example, you could decide to make an offer to lend £10 @ 15% if you decided this is what the risk merited. The beauty of this was that the market decided what the risk was worth. It was great and I earned some nice returns with relatively few defaults. Sadly Z removed this option and with it the ability of the lender to price the risk they were willing to take. I stopped lending through Z and let the existing loans run their course.
Becoming a little braver
As someone who was keen to manage my own risk, I decided to try Funding Circle (FC). I liked the idea of lending to businesses and doing something for the economy while earning a return. At one stage I had around £5000 on loan across a range of businesses. Again, the lender could read the profile of the lender, see financial information and ask the borrower questions. Here again, the lender was able to price risk based on the information; as an example, borrowers who didn’t answer any questions asked of them would be avoided as it was taken as an indication of their commitment to the cause. Similarly, I would avoid borrowers asking for significant sums of money, (at the time, up to £250k – the lending limit is now much higher) but gave a 2-line explanation as to why they wanted to borrow. I raised this with FC a few times arguing that no bank in the world would lend someone £250k with a 2 line business plan, but it didn’t get me anywhere. I grew frustrated with this and curbed my lending via FC, although it must be said, I have earned a better return through this platform than any other P2P lender. Finally, FC went the way of Zopa and removed all interaction from the process and I stopped lending altogether and let the loans run their course.
A lower risk option
At the same time as I was lending via FC, I started using Ratesetter (RS). I had heard of RS before, but as the returns were lower than others, I avoided them. I looked into them in a little more detail and decided that I liked their business model: No lender fee, unlike the other websites, and the provision of the fund to pay any lenders should their borrower default, again, funded by the borrowers. There was minimal interaction, but the website is without doubt the best of the three I’ve used and is really user friendly. At one stage I was lending over £20k through RS. Sadly, things took a turn for the worse as RS made some dodgy loans which looked like they might go bad and RS even took the step of guaranteeing loans from one of the books. While this was happening, RS gave lenders the option of selling their loans for free (there was normally a charge for selling a loan) which I agonised over. All the news coming out of RS was that everything would be fine and they did an excellent job of keeping us updated but I ultimately decided the risk was too great and cashed in the outstanding loans as I was about to start a house refurbishment and couldn’t afford to lose the money. Time has shown that I should have toughed it out as RS is still going strong.
With the coming of the Innovative Finance ISA, I have begun lending through P2P again, starting with Z as they were the first (who I trusted) to lend money via and this tax year through FC. Although I am still unhappy at the lack of interaction and the lower returns available than in the good ol’ days, the fact they are tax-free makes it worthwhile.
Update for 2019
Unfortunately I can’t calculate the exact return on the money I had on loan through the various P2P platforms, but it was between 6% and 7.5% after defaults and bad debt etc, which, given that most savings accounts were paying less than 1%, was frankly fantastic.
I know there has been some bad press on P2P (I’ll leave you to do your own home work on these), particularly in China but also closer to home and I have to be clear that the above doesn’t constitute advice or a recommendation – it is a risky business, no two ways about it – I had plenty of defaults over the years I was lending – just that my own experience has been very positive and I will be getting back into P2P as a means of diversifying some of my personal cash investments…just as soon as I’ve got some cash again.