A Reserve Fund For Funding Circle Lenders

If you lend to Funding Circle* A+ business borrowers you can currently earn more than at RateSetter, Lending Works* and Zopa, but with a better recent record of repayment than RateSetter and Zopa.

Yet Funding Circle doesn't have a bad-debt provision fund and the others do.

If that puts you off lending through Funding Circle, it doesn't have to.

You can have a better bad-debt provision fund at FC than at all the others!

Before I get to that, I'll just briefly compare their interest rate and bad-debt records:

How interest rates compare

Interest rates on Funding Circle's A+ loans are generally between 6.5% and 7%, regardless of the length of the loan.

Lending Works and RateSetter are the next highest at 6.3% and 6.1% respectively. Zopa, which has established by far the longest record of being low risk for any P2P lending website in the world, has a correspondingly lower rate at 5%.

You only get those rates at Lending Works, RateSetter and Zopa if you tie yourself in for five years. (You get less if you go for a shorter deal.)

How bad debts compare

Funding Circle has recent bad debts as low as Zopa's, with just three out of every 1,000 loans having gone bad. Late payments are noticeably lower, with just two loans out of 1,000 currently late compared to seven out of 1,000 at Zopa.

The comparison isn't entirely fair. Business borrowers tend to be higher risk which is why they pay higher interest rates.

However, clearly Funding Circle* appears to be selecting and grading borrowers remarkably well and the label it has given its best borrowers, “A+”, seems entirely fitting.

Only Lending Works* has a better record on bad debts. (This is as it should be; it is still pretty small so it can be super selective of the borrowers it accepts.)

Bad-debt provision funds are an extra cost

A bad-debt provision fund is a pot of money that is ultimately funded by you and other lenders.

(Yes, you. Not the borrowers. Regardless of what any P2P lending websites say, the borrowers always pay you and you pay the P2P lending websites, and part of your costs go towards supplying provision funds. Read more in There's No Such Thing as “No Lender Fee”.)

On a well run P2P lending website, that pot of money sits there idly doing relatively little except when the economy is bad.

So, if you lend to Zopa for ten years and there is no financial crisis in that time, it will probably have just been another cost for you.

Create your own fund

Better than a bad-debt provision fund is to create your own reserve pot by adding more to your cash savings. This way, you still have a pot of money sitting there, but a) it's not idle because it's earning you interest and b) it's more flexible, since you can still use it for other emergencies if you have to.

And c) when you stop lending through P2P, you might still have some of the fund left which you can use as you please. If you had paid it to RateSetter's, Zopa's or Lending Works' funds, it would be gone to you for good.

How big should it be?

RateSetter has the largest, fattest bad-debt provision fund. It's £15 million pot is worth over 3.5% of all outstanding loans. A Funding Circle bad-debt provision should be at least the same size probably, taking into account the fact that it is harder to spread across as many loans as you can with RateSetter.

That said, if you stick to Funding Circle A+ loans only, a 4% pot seems satisfactory to me.

Don't forget the big things

While a bad-debt provision fund is nice to have, you can't lose sight of the most important things in P2P lending. That's why you must continue to lend to lots of borrowers across several P2P lending websites to spread your risks.

If you've not tried Funding Circle*, it will add more diversity to your loans. Zopa and Lending Works* focus exclusively on personal loans, and RateSetter mostly does personal loans with some property and business loans thrown in. It is sensible to lend not just across different P2P lending websites, but across different types of loans to spread your risks further.

More: Get Started With The Safest Peer-to-Peer Lending Websites.

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