Update May 2018: A couple of years on from writing this post, and one of the platforms mentioned below (Collateral) has gone into administration. It goes to show that chasing high returns comes with high risk!
Can you consistently achieve returns of 10%+ investing in Peer-to-Peer platforms?
Is it possible to earn 10% or more from a portfolio of peer-to-peer lending sites? Many of the more established platforms offer rates of 7% or less, but often come with the upside of a more established track record and often provision funds to cover against losses.
Higher returns often come with increased associated risks. However, I think with a diversified set of loans across a number of the highest paying platforms you can reduce the potential losses from an economic downturn, platform risk or other unexpected shocks. Going forward I am going to track a subset of my peer-to-peer investments which I’ve labelled as the ‘10% club’. These are:
The 10% Club Portfolio
- Funding Secure. Expected/Historic returns after bad debt is in the range 11.2%-11.4%.
- Ablrate. Many loans in the range 10%-14% and many positive anecdotes on forums of the company management and how they deal with bad debt.
Collateral. Flat returns of 12% backed by assets.
- Unbolted. 10.5% returns possible with provision fund. Secured lending, often auction related, which I go into more detail in the Unbolted review. Loans secured against gold also available at 8% but I will update auto-bid to focus on the higher paying. It’s much harder to get invested via unbolted as there are less opportunities, but due to the the automated investment it earns its place in the 10% club portfolio.
- Saving Stream. Returns of 12% per year backed by property.
- MoneyThing. Returns of 10%+ backed by assets.
I will track my personal investment performance in these along with my general monthly income report. Including new customer or cashback offers you can often achieve 10%+ returns in many other platforms for the first year, but the purpose of this portfolio is to create a scalable and consistent set of investments.
On their statistics page Funding Circle do a great job of showing how you can reduce risk by diversifying your investments into at least 100 different loans. With individual investments at a maximum of 1% per loan as opposed to 10% per loan, Funding Circle show that the percentage of investors with average returns after bad debt of under 4% per annum fell from 3.5% to just 0.2%. You read in more detail at the bottom of our Funding Circle review or directly on their statistics page.
The question is whether you want to diversify into 100+ loans per platform, 100+ loans across all your platforms. Of the six platforms in our 10% Club portfolio, Funding Secure offers easy diversification into a 100+ loans just within their offering. Ablrate and Saving Stream have a lower number of loans, but with a little time you can still split your investment across 20 or so loans on each of these. MoneyThing, Unbolted and Collateral all appear to offer a wide range of loans, but it is hard to spot the dependencies as there may be multiple loans listed to the same borrower. My personal view on this question is, try to get about 20 good loans on each platform, then diversify further if its easy. Often you find yourself with a maximum bid of £25 or £50 on the highest demand new loan offerings so you are forced to diversify into many more loans.
There’s a risk of the platform itself going down and investors struggling to recoup their money directly with the debtor. Looking at this simply, with 6 platforms you’d hope that no more than 1 or 2 would go down in a worst case scenario!
Then there is the risk of an economic downturn. With Funding Secure and Saving Stream particularly heavy on property this could make it harder to achieve the stated loan-to-values. Collateral and Unbolted are more focused on pawn-loans, which you may expect to hold their value even in a downturn. Ablrate is a little harder to examine with their aviation niche, but at least offers a little diversity from the other platforms. MoneyThing is what you make of it, there’s a large number of property loans but then you also have auto back assets or other collectivised pawn loans.
Finally there’s a risk of a collective loss of confidence in peer-to-peer lending, perhaps with a string of companies going bust, a large scam or other unexpected shock where investors lose money on scale. In this case, the secondary markets would be flooded with people trying to sell out and your money may be held until the end of loan term. So of the portfolio, what are the typical loan lengths?
- 6 months: Funding Secure, Unbolted, Collateral.
- 6 months to 3 years: Money Thing, Ablrate, Saving Stream.
Hence in the case of a run for the gates, you’d have to be happy to slowly see the majority of your investment pay out over 6 months or so.
What Platforms Didn’t Make It:
- European P2X lending sites like Bondora, Mintos, Viventor, Investly or Twino. These often offer higher returns but for me, their operations further from UK FCA authorisation and the exchange rate movements adds additional risk. I did get in touch with Investly as it seemed more UK oriented but their support didn’t even reply.. not a great start!
- RebuildingSociety. High returns are possible with individual loans and many loans repay capital during the course of the loan, which you’d hope would reduce the risks of default. However I just have a bad gut feeling with this website so I’m holding off investing more until I see how my current investment pans out.
- Property Crowdfunding such as Property Moose or Property Partner. As these buy properties at substantial market discounts or invest in leveraged deals or those with high chance of capital gain, you could hope for 10%+ returns. However it’s difficult to assess returns on these month by month: you probably won’t really know the actual return until the properties are sold in a few years. As I want to report on this portfolio month by month these have not been included.
- Large minimum investment platforms like The Bridge Crowd or Market Invoice. These both offer 10%+ returns but with £5,000 per loan and £50,000 minimum investments respectively their out of my range.
- Other smaller platforms like Lending Crowd, Money & Co, Invest & Fund, Proplend, Funding Empire. I haven’t had time to fully research these so have left them out for the time being. Their headline rates could still warrant a future inclusion in a 10%+ portfolio.