April 8, 2014

Funding Circle Again

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As it now seems to be an annual tradition, here is my end-of-financial year report on Funding Circle. The peer-to-peer website has certainly flourished over the past 12 months. Many positive stories about the site and its competitors have appeared in the popular press. The volume of loans available has greatly increased. Right now 66 loans are available for funding, and that is lower than a normal day. The increase in loans does not seem to be matched by an increase in lenders (despite the government joining). Thus interest rates have been increasing over the last few months. Has this translated into better returns, or has financial stress created more bad debts?

After last year’s disappointing ~2% return, no extra money was deposited, so the maths for this year’s return is easy to calculate. Here is the summary.

Gross: 8.4%
After Fees: 7.4%
After Bad Debt & Recoveries: 4.1%

Much better than last year.

Interestingly the gross and after-fees returns are roughly the same as last year. Any increase in rates has come too late to make much of an impact on the full year results. The improved return is largely due to net bad debt. The rate at which loans goes bad has only decreased a little – just under 5% this year by value, compared to just over 5% last year. However, this year debt recovery has added 1.6% to the return, compared to 0 last year. The recovery process is slow and these extra returns are mainly from last years losses.

Funding Circle now claims I have a return of 4.3%. Much closer to my figures than last year. Although, they have added a note to the figure stating it is the annualised return since joining the site. This seems about right, so I’m no longer concerned by the discrepancy. The site also claims I should be earning 5.8%, so again my bad debt rate is higher than “normal”. I made a conscious decision to have a slightly higher than average risk profile on my loans (by lending to firms with a slightly worse than average credit rating). Even taking this into account, according to Funding Circle’s own numbers, I have bad luck. This is surprising considering how steady bad debt has been over the last two years. Will it even out next year, or is 5% about the right rate of deliquency?

What next? For various reasons not related to performance, no extra money will be deposited. Nor will any money be withdrawn – I’m more comfortable how the system is working, and it is still better than a bank. So until next year the status quo will continue.

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