P2P Lenders With eBay Syndrome

Individual lenders need to beware that:

• The difference between the highest and lowest bidders is typically around 25%.
• In addition, the majority of lenders bid lower than average, meaning some bidders are getting to take a bigger part of each loan at higher interest rates.
• A 20/20 rule seems to be developing: 20% of the time the highest bidders get 20% or more than the lowest bidders.
• In one recent auction, the highest bidders got to lend their money at interest rates that were 4.25 times higher than the lowest bidder.

Many peer-to-peer lending websites work by reverse auction, where the lowest bidders win the opportunity to lend their money to a borrower or borrowers.

I analysed recent data we captured from Funding Circle and rebuildingsociety and found that, in an average auction, some individuals get to lend their money for 25% more interest than others.

Typically, the highest bidder will earn around 8% more than the average rate and the lowest bidder around 9% less than average.

High bidders are often waiting till late in a loan auction, seeing what rates they need to bid to slightly under-cut the top bids, and then doing so.

Bidding too low is not just a missed opportunity. In their eagerness to win the bid, some savers are pitching interest rates that are too low for the risks involved.

This is rather like ‘winning’ an auction on eBay and then wishing you’d been the loser.

Only, with peer-to-peer, you won’t notice that you’ve made a mistake until the economy turns bad. That’s when you realise that you don’t have enough loans paying good interest to cover your share of the losses.

How to bid smarter if you've got little time

Take some time to consider what a fair interest rate is for the sorts of loans you’re bidding for.

I also understand you might want to bid lower to be certain you can get your money lent out quickly. But, if you’re patient and bid sensibly, the increased interest you earn from higher bids should make up for any delays from unsuccessful bids.

Plus, you’ll be much more likely to earn a return on your loans that is suitable for the risks.

If bidding strategy bothers you, focus on the lowest-risk P2P lending companies where the risks are small. These invariably make it easy for you to get your money lent out and spread across lots of loans.

Switch on autobid or never lend more than a fraction below the current average to ensure you're not subsidising other lenders' profits too much.

For those of you with enough time on your hands, you could even join the high bidders and get safe returns above 10% per year, provided you spread your money across lots of loans and lend regularly.

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