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Low Risk, Market Beating P2P Lending Opportunities

This guide will be updated regularly with the latest low risk, market beating P2P lending companies

If you've been using the easy P2P lending options:

  • You can earn dramatically more interest while keeping your risks low.
  • You need to be willing to put a bit of extra effort in.

For these low risk, market beating P2P lending opportunities, you need a bit more time on your hands, but it's worth it!

Low risk, great! But boring

Before I show you those opportunities, here's a quick contrast with the P2P lending companies most people flock to when going for safety. These more popular options:

  • Make it easy for you to spread your risk across lots of loans by automating the process and choosing your borrowers for you.
  • Only lend your money to quality borrowers or, for property lending, the average loan size is considerably less than the property is valued at.
  • Have a large bad-debt provision fund.
  • They also tend to have pretty, sleek, easy-to-use websites.

You can read about the above websites and see which of them are currently paying the best, as well as see how their interest rates and risks compare to savings accounts, in Safest Peer-to-Peer vs Savings Accounts.

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“Boring” impacts interest rates

Don't get me wrong, I love those safest P2P lending options! Boring is beautiful and highly appropriate for most savers and investors, who have little time or interest.

But for people who want to be more active and regular in selecting loans, you have extra opportunities.

In addition, the popularity of those “boring” websites can mean that the interest rates are sometimes pushed lower. More lenders competing to lend means lower interest rates.

And it's particularly easy for people with little time for research to get the impression that a bad-debt provision fund means that it must always be safe.

It doesn't help that many money tips and money comparison websites bung P2P lending in with savings accounts, as if the risks are the same!

We don't need no bad-debt provision fund

I actually think many people believe a bad-debt provision fund is essential for safety.

Not so!

There are other very low risk options if you know where to look.

Since they're generally less popular, it will often mean that fewer lenders are competing and pushing rates down. This also increases your safety, since higher interest rates helps to cover the cost of any losses you experience across your loan portfolio.

These P2P lending companies also let you select your loans and choose your interest rates yourself, giving you a good chance of getting higher than average interest rates.

With all this in mind, I'm going to start building and maintaining a list here of the low-risk, market-beating P2P opportunities.

The opportunities listed here will change as and when our assessment of the risks in these companies change, and as their interest rates fall and rise.

Funding Circle A+ loans

To get my list going this week, our first candidate for active outperformance at low risk is Funding Circle's A+ loans.

Funding Circle offers you business lending, with some of the loans being secured against property. It's the second oldest P2P lending company in the UK and one of the oldest in the world. Over half a billion pounds has been lent on it and something like half of that was last year. (From memory. Don't quote me on that.)

Funding Circle has its own grading system for borrowers, starting at A+ and ending at C-.

It's the A+ ones that interest me. Here's why: less than a dozen Funding Circle loans graded at A+ have gone bad.

That's out of more than 1,300 loans over four-and-a-half years!

Even allowing for the fact that some loans will have been downgraded from A+ (a potential warning sign to get out), this is a very good record indeed. That's why it has a low low 4thWay® Risk Rating of just 13/50. (A rating of eight would be as low risk as a savings account.)

At first sight, interest rates aren't hugely impressive

The average interest rate lenders are getting right now on Funding Circle is around 6.6% after fees and estimated bad debts. (That's 8.2% before fees and estimated bad debts.)

In addition, Funding Circle appears to generally overestimate bad debts.

This compares to around 6.4% currently with RateSetter, which is the highest paying of the “boring” ones I mentioned at the start.

Considering RateSetter‘s 4thWay® Risk Rating of 10 is the lowest of all the risk-rated P2P lending opportunities (largely due to its very fat bad-debt provision fund which is nearly 4% of all outstanding loans), RateSetter still currently pips Funding Circle to the post when balancing both risks and rewards.

On average!

But unlike most RateSetter lenders, you don't have to accept average or near average rates on Funding Circle.

A quarter of A+ loans are high payers

In a quarter of the A+ loans (80 out of 323) over the past three months, lenders have got an average of 7% to 9.5% after fees and estimated bad debts. (And estimates of bad debt have been high, as I have already pointed out.)

At these sorts of premiums over websites like RateSetter, Funding Circle's best-quality loans get very interesting.

Some A+ loans are secured against property

In addition, 43 A+ loans in the past three months were secured against real property and the size of the loans compared to the property valuations have been impressively low. At when I have been perusing the loans for myself.

Typically, the interest rates on these loans is 6.4% after fees and expected bad debts (8% before) plus they usually pay at least 0.5% cashback on top, which you get paid as soon as the loan goes ahead.

High bidders win surprisingly often

Also, with Funding Circle you could get better than the average interest rate in a given loan.

Close to 4/10 A+ loans (123/323) in the past three months have had individual bidders who have both got more than the average interest for that loan and earned between 7% and 12.5% after fees and estimated bad debts.

I say again: that's after fees and estimated bad debts!

Those rates seem to me to be extraordinary for the level of risks involved. Let's put it this way: the average interest rate lenders have earned after fees and bad debts on Funding Circle has been 6.3%. And that's across loans graded from A+ to C-.

So what I'm telling you is that you can get higher interest rates while taking much lower risk!

The downsides

There is one key downside to going for these Funding Circle A+ loans instead of the “boring” P2P lending companies: you need more time.

You have to find potential loans to bid for, and then you have to bid, and potentially bid again if you get outbid.

As another downside, I was planning to write that potentially it will also take you longer to spread your risks.

However, going by my numbers above from the past three months, there appear to be an awful lot of opportunities.

If you want to lend across, say, 100 loans (it would be perfectly reasonable to lend in a lot less if you also lend across other P2P lending companies and measure your results by your overall average) then it'll take you several months to get fully lent out. (More if you have a lot of money to lend). But that's normal at almost all the P2P lending companies.

Only the P2P lending companies with automatic diversification across the whole loanbook (that's “boring” companies RateSetter and Wellesley & Co. a property P2P lending company) can spread your money out widely and instantly.

Until you can fully spread your money across enough Funding Circle A+ loans, you could park some of it in a savings account or at other P2P lending companies. It makes sense to spread your risk across several of them anyway.

Read more in Funding Circle Lending Strategy.

I'll be adding more low risk, market beating P2P lending opportunity to this web page.

4thWay® Risk Ratings: no risk-rating system is ever perfect and they cannot consider all factors and future events. Read more about the 4thWay® Risk Ratings.

*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from Funding Circle, RateSetter and Wellesley & Co., and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

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