Funding Circle Lenders Get Higher Rates

The big news for lenders today is the big jump in interest rates that I noticed this morning.

In other significant news, Funding Circle is also celebrating £500 million of loans matched between borrowers and lenders like you – including me.

Let's start with the rate jump

I don't know if it'll last, but this morning, the latest five loans for three of the borrower grades jumped a lot.

After fees and expected bad debts:

Expected A+ returns were showing as 6.1%, up from 5.6%.

Expected A returns were showing as 7.1%, up from 6.1%.

Expected B returns were showing as 7.5%, up from 6.7%.

The rates contributed to a big jump in the 4thWay^® P2P Forecast Returns Index today, from 4.74% to 4.84%.

Are these rates high enough?

I think that lenders have been competing too hard to lend on Funding Circle recently and had pushed rates too low. They've been too low for several months in the riskier grades, and too low for a few weeks in the A+ market.

Let's put it this way: why would you have lent your money for 5.6% in the A+ market when you wil get around 6% at RateSetter with its fat bad-debt provision fund? Even now, the average rate for A+ is not high enough when you have options like RateSetter and Lending Works.

The only reason for accepting average Funding Circle rates might be for even more diversification.

Expected returns for the A market might be just about okay now, although I'd prefer to see more.

Bear in mind these are just average rates for lenders. If you choose to bid manually, rather than use autobid facility, you can get significantly better rates.

Also, bear in mind that Funding Circle seems to forecast bad debts on the high side so, at least during good times, you can probably expect to do better than “expected”, although you still need to spread your money across lots of loans so that one or two bad lenders can't wipe out any interest you've earned.

Why have the rates jumped so fast and so far?

These sorts of large jumps are unusual. 4thWay records show that rates tend to stay reasonably steady and not jump around.

I would like to think that lenders have collectively realised that they need to bid higher. More likely, though, there has been a big surge in borrowers. If there are more borrowers wanting loans, lenders don't have to compete so hard between them to get their money lent out. Which means they don't have to outbid each other with lower interest rates.

Funding Circle breaches £500 million

Funding Circle has matched half a billion loans in four-and-a-half years to over 7,000 businesses.

This is what entrepreneurs call a “vanity metric”. A good chunk of the loans are in the passed and have been paid off. For all you know, Funding Circle might be shrinking, and matching fewer loans, but it can always add the few loans its done to the previous total and say that it's “growing”.

However, it reall is growing. To show you how fast P2P lending companies are being accepted, £300 million of that half a billion was done in the past 13 months or so.

Lots of loans is useful to lenders

Lots of loans and a large market is kind of useful for lenders in that a large, busy marketplace makes it safer and easier to lend and exit loans early, if desired.

So this headline “vanity” rate is not merely just a publicity stunt by Funding Circle.

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