Digging into the data: the secondary market

In the second instalment of our data blog series, we take a look at the secondary market data in more detail. The secondary market enables investors to buy and sell their loan parts with each other. This means new investors are able to build up a diversified portfolio very quickly and it also gives investors the ability to access their money early if needed. This blog will take a look at the ability to sell loan parts and the average time it takes to access money.

Accessing your money

In total £77 million has been traded on the secondary market to date, with £2 million traded in October alone. Since we extended the types of loans we offer in April to include small businesses who develop or invest in property, the share of property loan parts listed for sale has also increased. In October 83% of loan parts listed for sale were for business loans and 17% for property. Given that the proportion of property loans is currently 7% of the total outstanding loans, we have split the data out to show access to business loans and property loans separately.

2-Business

When investors look to sell their loan parts, approximately 50% are listed for sale at a premium. For example, a B loan part earning 9.0% per year might be listed on the secondary market at a premium so the buyer rate is 8.8% earning the seller a margin at sale. However we can see above that listing at par means loans parts are more likely to be sold.

Not only does listing at par affect the likelihood of loan parts being sold, it also helps to speed up the time taken to sell.

1-Hours-to-sell

What about property?

Turning now to property loan part listings, we can see below that a lower proportion of these have sold over the summer compared to business loan parts. Comparing the lines on both graphs, discounted loan parts actually sell at a relatively similar rate (~70-80%) on both property and business loans, however fewer par and premium property loan part listings go on to be sold.

This difference appears to be primarily driven by the 2% cashback promotion we have been running on property loans. Early investors may remember that we ran a similar promotion when we launched back in 2010. It gives investors an incentive to try a new type of loan, as well as give us some time to learn and refine our processes. Now that we have passed over £23 million lent on property, we will be running this promotion down. We did the same when we reached a similar milestone four years ago.

3-Property

Liquidity varies on the secondary market

You will have seen in both the business and property loan graphs that there have been variations in liquidity in 2014. This means that at times it has taken more or less time to sell loan parts to other investors. There were two particular events which contributed to lower secondary market liquidity.

The first was between January and March, when the supply of new investor funds was not growing as fast as the demand for loans from businesses. New money therefore predominantly went towards buying primary loan parts as interest rates increased, leading to a fall in liquidity on the secondary market.

The second event following this was the introduction of lending on property loans in April. This meant secondary market liquidity stayed at a similar level. When new types of loans are launched, we expect them to have a temporary impact on the marketplace during a cashback period.

In conclusion

We hope that this blog post has helped to provide some more information and data on how best to sell your loan parts, should you need to access your money quickly. It is important to remember that Funding Circle is a marketplace, so access is dependent on there being a buyer for your loan parts, however the data clearly shows that selling loan parts at par or a discount will ensure a higher proportion are sold quickly. For more information on exactly how the secondary market works, take a look at our FAQs.

The Funding Circle team

Natasha

Head of Corporate Communications

 

23 thoughts on “Digging into the data: the secondary market

  1. This doesn’t chime with my experience. I’ve been trying to sell all my loan parts for over six months now, listing and re-listing them repeatedly, at par and at various discounts. So far, I’ve managed to sell about a quarter – at a rate of about two sales per month. Not happy about it at all – the advertising literature suggested it would be easy to withdraw my money from FC, but this is not true.

    • this is also my experience. I have been trying to sell my loan parts for more than a month, and they are just not selling. my money is locked in and I am not happy at all.

      • Hi both, we provide the secondary market as an option for investors to access their funds before the end of the loan term, however we are unable to guarantee that loan parts will be sold within a specific time frame. As another investor needs to purchase a loan part from you, there are a couple of factors which can contribute to the ease of which loan parts are sold:

        1) Size of the loan parts – larger loan parts can be more difficult to sell.

        2) Rates held on the part – if the rates you hold on a part are lower than what is generally available on the marketplace for that risk band, other investors may not be as willing to purchase that part, resulting those parts taking longer to sell.
        For your information, the minimum bid rates for each risk band are currently:
        A+ = 6%
        A = 8%
        B = 9%
        C = 10.2%
        C- = 12.2%
        If the parts you hold are lower than this, they may not be as appealing to other investors. You can consider adding a discount to those loan parts (done through the sell individually tab), which could potentially make those parts more attractive to other investors. I hope this helps but please get in touch with the customer service team if you would like to discuss in more detail.

    • The buyer rate you offer needs to be within 0.5-1.0% of the top rate for that risk band on the sencondary market for the loan to sell within a week or two. Of course it also depends on the premium/discount. I usually sell at a premium of less than 1%. For lower premiums/higher discounts you get more leeway.

  2. I’m sorry to hear that ‘guest’. I think that whether you buy at a good rate ,and are thus able to offer a good rate must make a big difference. I also find it hard to sell some loans, even though I buy in person, and thus almost always at the top of the range for that loan. The problem is that the minimum rates have risen substantially- great for when we’re buying, but terrible if one wishes to sell an older loan ,which might have a rate over 1% lower than the guaranteed rate on the new listing market . Did you have problems selling even when the discount brought the rate above the current minimum ?

  3. I’d add that ,when I’ve sold loans ,I’ve always looked at the current rate offerings for that loan, and targeted my offering, near or better than the best of them. So far ,I think I’ve sold all of those I’ve put on, within one to three attempts but not more than about £1000 worth or so ,so far. It does take a bit of application, which reduces the return for time spent. i also buy in £20 parts ,to maximise diversity, and ease selling.

  4. What % of loans are sold? I understand that the data provided is on sold lioans NOT on all loans which have been on sale? Please can FC comment.

    • Hi Sonia, this data includes all loan parts listed on the secondary market for the full 14 days. For business loan parts, 77% are sold when listed at a discount, 73% are sold when listed at par and 35% are sold when listed at a premium.

      This data does not include de-listings (where investors decide not to sell a loan part and take it down for sale), but if you want to take a look at that data and the difference it has, we have posted it on the forum here: https://forum.fundingcircle.com/forum/talk-to-fellow-members/all-about-lending/9691-new-data-blog-secondary-market
      For business loan parts listed at par, there is about an 8% difference in the proportion that go onto be sold when we include de-listings.

  5. The comments that suggest recovering one’s money is not as easy as claimed by FC is very worrying. This will lead me to be less enthusiastic about the whole operation.

    • Hi Tim, Autobid will purchase loan parts sold at par, but it will not purchase loan parts sold at a premium or discount. Hope this helps.

      • That answers my question, but raises another.

        Why doesn’t Autobid purchase loans offered for resale at a discount (or at a premium, if the interest rates are sufficient)?

        • Potentially because if this happens, sellers looking to get rid of distressed loan parts (those whose repayments do not tend to be consistent) might game Autobid by selling at deep discounts. The buyer then takes on the risk. Selling at par reduces that scenario since par is what most people sell at, thus reducing the likelihood that Autobid ends up with a distressed part.

          • Aren’t Autobid users already protected by the risk band?

            Autobid users rely on the risk band alone to avoid bad deals in the case of new loan requests. Why not in the case of the secondary market? Doesn’t the risk band reflect the risk in the case of resales as well as it does in the case of new loan requests?

            What stops Autobid users from buying distressed loan parts at par? Presumably parts of downgraded loans can rarely be sold at par, so downgrading would protect Autobid users. Doesn’t this happen already?

            On the other hand, if the prevailing interest rates have risen, parts of downgraded loans may still be saleable at par. Does that put Autobid users at a disadvantage? I don’t think so, but I also don’t see a salient difference between this and selling at a discount.

            Remember that there are restrictions on the secondary market for the protection of buyers (both Autobid users and non-Autobid users), including the prohibition of resales of parts of loans that are in arrears or have no risk band.
            https://support.fundingcircle.com/entries/22558122-Are-there-any-restrictions-on-loan-parts-that-I-can-sell-

          • So if you have a distressed part, instead of discounting it and allowing some one else take the risk for an increased gain, you should just sell it at 0% and palm it off to some one using the auto bidder?

      • Any plans to change this so autobid simply works on the bidders required estimated returns? This is the ethos behind the whole auto-bid system so it doesn’t work in anyone’s favour for it not to be possible with loan parts. You can’t sell on unpaid/defaulted loans anyway, so people can’t play the system to offload unreliable debts. I agree with the others that I feel mislead by FC’s claim that you can pretty much liquidise your portfolio in hours, as it simply isn’t the case and this restriction is a big part of the problem.

        • It helps both sides, stops investors sat with dead money in their accounts and allows people to liquidise quicker. No brainer.

  6. Sorry, but I just don’t understand the first graph.
    For example it seems to show that in May 80% of parts sold at a discount, 65% at par and 40% at a premium. That adds up to 185% ???

    • What the graph shows is the percentage of each groups of loans that sold, using the figures you quoted, then for every 100 loan parts put up for sale at a discount 80 would sell in the 14 days, but only 40 of the 100 parts offered at a premium would sell. Therefore loan parts offered at a discount were twice as likely to be sold compared to those that were offered at a premium.

  7. I buy plenty of parts on the secondary market and there are some pretty obvious pointers for sellers.
    Selling at a premium is not attractive (this is even more so now that the filters allow one to take out all offerings that charge a premium)

    If you bought at a low rate then it will be difficult to sell on (again the filters allow one to screen out rates below a chosen minimum).
    Larger loans are not so attractive.
    These might seem self evident, but by the numbers of sellers on the site still trying to sell low interest rate loans and at a premium then I’m afraid they have little chance. As more people get to know about the filters for buyers then you will not sell if you are out of the market rate – either the rate or the premium.
    As ever in life, if you want your money out early then you have to be prepared to sacrifice something.

  8. I was wondering whether the size of loan parts is related to the ease of selling on the secondary market. In my brief experience, selling small loan parts was much easier, regardless of whether they were at par, or at a premium. Is there any data on this?

    • Hi lolgreece, yes we have data on that and will be posting a follow up to this blog in February which will look at the impact size of loan parts can have, as well as rates on the secondary market.

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