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The Worst and Best Month to Lend
Two factors can impact the best and worst times to lend your money: peak borrowing months and the see-saw that P2P lending companies struggle with to keep borrowers and lenders in reasonable balance.
Worst and best month to lend to consumers
Kevin Allen of RateSetter has 20 years experience in finance and in risk management in particular. He said that peak borrowing times for personal loans is January. A surge in borrowers means we can more easily lend our money quickly, so January seems to be a good month to do so.
On the flipside, data from both Zopa and RateSetter – two P2P lending companies that mostly lend to consumer borrowers – shows that the number of weekly completed loans dropped towards the end of the year.
This is quite telling, considering both companies are growing at a staggering rate most of the time.
December is often a slow month. In December 2014, Zopa went so far as to warn that some new money (as opposed to re-lent money) wouldn't be lent till January, although it paid some of its users a reasonable bonus for each day their money was unlent that month.
Best months for business lending
Funding Circle‘s staggering growth rate, almost month after month, means that it's hard to spot the best times to lend. Discounting for its rapid scaling as best we can, the pattern is quite similar to consumer loans, although it is less clear cut.
The see-saw effect
Peer-to-peer lending is cyclical in a way that is not related to calendar months.
A P2P lending website can get a surge of borrowers and then a surge of new lenders. Each encourages the other to come piling in, because more borrowers makes it easier for lenders to lend at higher rates and more lenders makes it easier for borrowers to borrow at lower rates.
The converse also happens, as on the other side of the see-saw they might beome discouraged.
If you look at RateSetter, which anecdotally has few complaints from lenders about getting their money lent out swiftly at good rates, it saw several periods in 2014 lasting many weeks where the number of completed loans fell.
This is despite the fact the company generally grew very quickly, with new monthly loans rising from under £15 million in January 2014 to £30 million per month by the end of the year.
The impact on interest rates
Neither this see-saw nor the December/January period appears to dramatically affect interest rates directly.
Lending Works raised rates this month considerably and now pays 6.1%, up from, 5.5% on five-year deals, making it the the top-paying deal of all the safest P2P lending companies with bad-debt provision funds that are also easy to use.
But, if this is due to greater borrower demand, it is more anticipated demand that has not yet emerged.
However, there is another, indirect impact on the money you earn. During a bad month like December or at the bottom of the see-saw you might have to wait longer for some of your money to be lent, or re-lent after receiving a repayment.
RateSetter is the only company to provide us with the information we need to see how much money sits around. In this case, very little cash remains unlent.
So long as this remains the case, the impact at RateSetter might be to lose 0.1 to 0.2 percentage points of interest per year. We can expect that some other companies will lose a few extra tenths of a percentage point.
Where your money is never idle
Wellesley & Co. – a property P2P lending company with a bad-debt provision fund, automatic diversification across all loans and zero historical losses – pays interest whether you're money is lent out or not and you don't even have to re-lend repayments.
It did, however, lower interest rates in December. The five-year interest rate now pays 5.4%. (Note that the Wellesley website says it pays 6%, but we convert its interest rates to the same calculation used by most other P2P lending websites, so that the real interest you earn is easier to compare.)
Coming up next…
P2P ISAs are on the way, which means tax-free lending. This will attract a wave of new lenders and will encourage even more financial advisors to learn about P2P and recommend it. Potentially, at least for a short time, the benefit of tax-free lending will be dampened by lower interest rates.
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