Funding Circle Expansion Loans Are Lower Risk
When you look deep into the detail of Funding Circle's* loans, you get some interesting patterns.
Today, I compared the two biggest types of loans: “expansion/growth” versus “working ” loans to see how they compare on both bad debts and interest rates.
Is one riskier than the other and is the interest rate higher to compensate? The answers are surprising and (to me anyway) delightful.
So the theory goes
You would imagine that companies looking to expand probably aren't usually businesses that are worried about their finances right now. Whereas those looking for money just to keep things running – “working” – might potentially have more issues.
The figures are supportive of this hypothesis.
Not only do the A+ and A loans have a lower proportion of workingloans compared to expansion loans, but bad debts are also higher for for expansion/growth loans across every borrower grade.
You're not rewarded for taking bigger risks
You might think that's fine so long as you receive higher interest rates for lending in workingloans, but that's not really what's happening.
Firstly, let's compare the bad debts and interest rates on Funding Circle's incredibly high quality A+ loans, split by each loan type: expansion or working.
Then we'll look at all borrower grades together, not just A+, but again split between the two loan types.
A+ loans: interest rates and bad debts
Under 0.8% of all A+ expansion loans have gone bad and if you split your money roughly equally between your loans that would have earned you 6.86% before bad debts.
Approaching 1.2% of all A+ workingloans have gone bad – that's around 0.4 percentage points more loans going bad – but you have just made a measly 0.06 percentage points more interest at 6.92% before bad debts.
With interest rates virtually identical, you could well have earned less with the workingloans after deducting your bad debts.
Note that both of these records are still fantastic. Funding Circle* A+ borrowers have very low bad debt rates across the board.
It's just that if you have the time to select just expansion loans you can lower your risk even further while actually potentially boosting your interest rate a little after bad debts.
All grades: interest rates and bad debts
Under 3% of all expansion loans have gone bad if you spread your money evenly across all borrower grades. You should have earned 9.2% before bad debts.
In contrast, nearly 4.2% of all workingloans have gone bad – that's 1.2 percentage points more loans going bad – but, again, you have just made an insignificant 0.06 percentage points more interest at 9.26% before bad debts.
The difference could be starker in a recession
The difference might be more pronounced in a recession.
While both types of loans will see greater bad debts, you might well see that bad debts on the higher risk loans – by which I mean workingloans – will climb further and faster.
So if you have time you might aim for more expansion loans over workingtypes.
Read more on getting higher rates with lower risk in Funding Circle Lending Strategy.
Interest rates in this article are based on rates so far in 2015 and are after fees. Bad debt figures are based on all loans ever matched by Funding Circle. In addition, I excluded borrower grade E from the analysis because that borrower grade is too new, using grades A+ to D.
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