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Funding Circle A+ Loans Are High Interest For Low Risk

By Matthew Howard on 26th November, 2014 | Read more by this author

Samir Desai, CEO at Funding Circle, the largest P2P lending company focused on loans to UK businesses, did a presentation called “Building A Better Financial World” at industry conference LendIt.

Samir said that expected average returns for all Funding Circle loans after fees and bad debts, but before taxes, are 7%. That's across all loans from prime A+ borrowers to junk-grade C- borrowers.

Yet average returns for Funding Circle's lowest risk, A+ loans is currently  6.9%, based on the last 50 loans made.

That the expected returns across all loans is basically the same as the lowest-risk loans suggests that those taking higher risks are getting practically the same returns as those playing it safe lending to A+ borrowers.

It also suggests that either lots of individual lenders aren't demanding high enough interest rates to make up for the extra risks taken, or that those lending to A+ borrowers are currently managing to get better returns than they should do.

Just 10 bad loans out of nearly 1,000

Quite possibly it's a bit of both. Funding Circle's 4thWay Risk Rating of 13 for A+ loans is very low for a P2P lending company with no bad-debt fund, due to its incredibly low bad-debt rates.

Out of all 967 loans at A+ in four years, only 10 have suffered bad debts and just five are currently late payers.

It's still too early days in P2P to say for sure, but near 7% rates for that level of risk looks like a great deal.

Yet there might be few lenders who just lend in the A+ market. It is potentially difficult to lend in every A+ loan without sometimes bidding considerably below the average.

Have lenders just not caught on yet?

One explanation could be that lenders are still expecting the worst. Samir showed how Funding Circle's improved vetting of borrowers has cut bad-debt rates in half over the first 12 months of a loan.

Individual lenders might still have in mind higher bad debts and be bidding higher rates in the A+ market accordingly.

Bear in mind that all the figures included here are averages. Some active lenders do far better and other lenders do considerably worse.

Samir's other  statistics to impress

  • More than $700m lent on Funding Circle UK and US in four years.
  • Roughly $60m a month now.
  • 150%+ growth per year.
  • 200+ employees.
  • $120m dollars raised by the same venture capitalists that backed Facebook, Twitter, Skype and Betfair.

Samir also revealed an outstanding Net Promoter Score – a common measure of how happy customers are – of 89. He contrasted that with -11 for UK banks!

Sources: Funding Circle

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