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The Safest 20% Returns In P2P Lending
“Safe” and “20%” interest is probably not a phrase that you can legitimately hear.
But “safest” and “20%” is something else. Because, of all the opportunities where you might be able to earn that return, one of them has to be the safest among them.
In the UK peer-to-peer lending industry, I believe it is the opportunities available on CapitalStackers' secondary market – where you can buy and sell existing loan parts from other lenders.
You should know the minimum you can lend in a single loan with CapitalStackers* is £5,000.
About CapitalStackers' loans
But before we get to trading existing loan parts with other lenders, we have to start at the beginning: what are these loans like to the lenders who are the first to lend?
You can read more details on that in 4thWay's CapitalStackers Review, but here are the two key points:
- You lend mostly to residential property developers, which means that the success of a loan hangs on the timely completion of a development project and a sale at a reasonable price.
- In most loans, you are very junior, meaning that another lender, such as a bank, is lending a lot more money to the borrower and will get their money back first in the event that the borrower is unable to repay all the debts.
Those two factors combined mean that these loans are around the intrinsically riskiest kinds of loans that you can do.
Sounds frightening, but the key word here that you must not overlook is intrinsic.
The type of lending by itself is riskier than other loans. And that is the intrinsic risk. But if the people approving and monitoring these loans are exceptionally good, as I believe they are at CapitalStackers, they can skew the risk-reward balance very nicely in lenders' favour.
They can do this by ensuring that fewer loans will turn bad than normal, and recoveries will be higher. CapitalStackers' record is still spotless. But, more importantly, I expect that their ability and pedantically high standards will continue to lead to an excellent record.
Even so, lenders demand to be compensated for intrinsic risks, which is why every one of them at CapitalStackers has received high interest of between 6.88% and 30.60%, with an average rate of 13.06%.
Give a boost to your interest by selling your loans early
So, I've set the scene, but here's where lenders can greatly increase the interest they receive to get 20%, 30% and even in some cases 40% on their loans.
The basic idea is simple: you sell your loans early for a higher price to other lenders. You don't wait for borrowers to repay you.
Here's how it works
So that seems easy. But how it is that you can make more money by selling early is a lot harder to explain clearly. So pay attention.
1. All the risks are ahead of you at the start of a loan
When a development is just beginning, the project has all the uncertainty ahead of it. Whether the developers are really capable of carrying out the project on time and on budget. Whether there will be an unforeseen problem at any stage in the building work. Whether selling the property for a reasonable price will be tougher than imagined.
Lenders should expect that the interest rates they are offered have priced in all of these unforeseen risks, when they are among the first through CapitalStackers to lend to the borrower.
2. Risk drops as each phase of the building work is complete
After several months, the development has progressed and some of the potential risks are now in the past. That initial stage of doing the groundworks can be particularly troublesome; for example, the subsurface might turn out to be more difficult to erect foundations on than was initially forecast.
3. As the risks drop, anyone starting to lend now is satisfied with lower interest rates
With some of the project in the past, there are now fewer risks ahead. CapitalStackers* keeps lenders regularly updated on progress, so loan-holders are aware of this. Lenders interested in buying into those loans at this stage know it too.
The demand for the highest premium on interest rates falls, so that anyone buying second-hand loan parts will be satisfied with a lower interest rate.
4. The initial lender still demands higher rates
But the actual borrower, the property developer, is still committed to paying the full rate that was agreed at the beginning. That rate is fixed.
What's more, initial lenders who are looking to sell loan parts at this stage aren't going to be satisfied by earning the same interest rate as future lenders.
After all, the first lender took the biggest risks and should be rewarded for it.
5. The buyer expects lower rates and the seller higher rates – the glove fits!
In order to make this adjustment happen, the seller can sell loan parts for more than they paid. In other words, if they lent £10,000, they could ask anyone buying loan parts off them to pay £11,000.
The seller also gets the interest that was due to them for the time they were lending. In practice, this often gives a huge boost to the returns that the seller receives in a shorter space of time.
CapitalStackers helps lenders looking to sell to estimate the sales price with tools, calculators and graphs.
6. The seller continues to earn the standard interest for as long as they hold the loan parts
There's no risk to sellers for putting their loan parts up for sale at a higher price than they paid for the loan. Until they are bought, they continue to earn more interest at the rate agreed with the borrower.
7. Buyers watch for early repayment from the borrower
CapitalStackers must – and does – keep lenders well informed of the possibility that a borrower will repay early. In that event, less interest will be paid out in future. This means that the buyer of second-hand loan parts could technically lose money.
The buyer paid a premium for the loan and would not have enough time to earn interest to make up for that cost if CapitalStackers wasn't clear that an early repayment was imminent, which reduces that risk.
A 14% interest rate becomes a total of 25%
And so I'll give you an example.
If a borrower was paying 14% over an expected term of 18 months, and a lender sells loan parts after six months, the expected boost would likely lead to a total return of around 25%. Like this:
- The lender lent £10,000.
- The borrower is due to pay £12,315 to the lender at the end, including interest.
- The lender sells the loan on to another lender after six months for £11,195, making £1,195. This is made up of £715 in interest earned so far and for selling the loan at a premium of £480.
- The buyer will earn £2,315 over the remaining 12 months, minus the £1,195 paid to the original lender, which means £1,120. It's still a double-digit return for the buyer, which is not shabby.
Note that the initial lender – the one selling the loan – earns more in six months than the the buyer earns in 12, due to an adjustment for the extra risks that were taken in the early stages.
Mathematicians amongst you will know that earning this much in just half a year means that the annualised interest rate is therefore double – at around a quarter of a century based on my example above.
You can now re-lend your money for the second half of the year to earn even more interest.
Read the 4thWay CapitalStackers Review.
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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