Digging into the data: improving returns

Since the Funding Circle marketplace first launched, estimated annual returns have increased from 5.7% in 2011 to 7.1% in 2014. In this edition of the Digging Into The Data series we examine how interest rates have changed over time, what has caused these changes and why investors are now earning more.

Gross interest rates (bid rates) have been increasing over time

You can see in the graph below that since Funding Circle launched in August 2010, the average successful gross interest rate has increased 25% from 8.3% to 10.4%. Let’s look at the main reasons for this increase in more detail.

Gross-interest-rates-versus-estimated-returns

1) Introducing new risk bands has enabled investors to earn higher returns

The Funding Circle marketplace launched with 3 risk bands (A+, A and B) for investors to lend across. As we have grown and understood more about credit assessment we have introduced new risk bands (C and C-) to provide even more lending opportunities to help investors spread their lending across as many businesses as possible.

These newer risk bands have an attractive risk-return profile. Since being introduced in June 2012, more than £103 million has been lent to C businesses with an average gross interest rates of 11% and an expected net return of 6.4%. £32 million has been lent to C- businesses  since June 2013 at an average gross interest rates of 13.3% and an expected net return of 6.8%.

2) The introduction of Minimum Bid Rates has gradually increased gross interest rates

In 2013 we introduced Minimum Bid Rates across all risk bands. Prior to this change, the minimum gross interest rate you could bid on any loan was 4% across all risk bands. From the start of 2013 we saw a sharp fall in gross interest rates. As a result, in mid-2013 we introduced minimum bid rates to increase the overall net returns for investors. Since this introduction average interest rates have increased 24% from 8.4% to 10.4% by the second half of 2014.

Minimum  bid rates

3) We’re improving our ability to manage the supply and demand of the marketplace

Whilst the introduction of new risk bands and minimum bid rates has helped to increase the overall gross interest rates for investors, these rates fall if there is an imbalance in the marketplace. This means there are too few borrowers for investors to lend to and causes gross interest rates to fall, creating inefficiencies in the marketplace. This is one of the biggest challenges at Funding Circle.

In order to better balance supply with demand we have introduced a number of new initiatives over the last few years. These include TV advertising and partnerships with banks and accountants to increase demand from businesses. We’ve also broadened the types of investors who use Funding Circle to ensure we meet this increase in demand.

spread of investors

Improving credit policies leads to a decline in losses

Alongside increases in gross interest rates over time, improvements in our credit assessment and loan servicing policies have led to increases in the actual returns investors receive.

We publish information about the bad debt performance versus expectations on our statistics page and update this information monthly. These results show that since 2010 our credit assessment policies have consistently improved. This is down to the work our credit analytics team is doing to create better risk models, by using more and more sources of data.

We are also getting better at analysing the propensity of a business to default after they have accepted a loan. Looking at the below graph we can see that in 2013, for every accepted business that defaulted, 4 that were rejected ended up in default, this is a 3X increase compared to 2011.

Bad debt performance over time

Finally, the loan servicing team have brought down the number of businesses that are late paying from 1.5% to 0.7% as a proportion of all live loans. When a business does default the loan servicing team work to reclaim as much of the loan as possible. Currently the recovery rate for defaulted loans is 19.4p, and this rate has steadily increased  from 14.6p since we started managing defaulted loans in-house. Long term, the expected recovery is anticipated to be ~40p – increasing to 44p for loans that defaulted in the first half of 2014, and 47p for defaulted loans in the second half of 2014.

Conclusion

We hope you enjoyed this post about the improving investor returns on Funding Circle. With future changes such as ISA introduction and new tax relief for investors, we expect that lending to businesses through marketplaces will become even more attractive for investors over time; however it is important to note that interest rates can go down as well as up as your capital is at risk. We always recommend investors spread their lending across at least 100 businesses where possible to maximise their returns. You can read more about diversification on our statistics page.


The Funding Circle team

David De Koning

Head of Communications

 

44 thoughts on “Digging into the data: improving returns

  1. You say “in 2013, for every accepted business that defaulted, 4 that were rejected ended up in default”, but I don’t understand how a business that was rejected, i.e. was refused a loan, could then default. Do you mean that you keep track of people who apply unsuccessfully for loans to see whether they subsequently get into financial difficulties?

    • Hi Mellbreak, We use publicly available data to track businesses in the UK, including those that have been unsuccessful with a Funding Circle application. We can use this information to better understand business behaviour and improve our credit assessment policies. This is very useful when we introduce new risk bands.

      • I suppose that some of them get into difficulties because they have been refused a loan – if they had support they might have been successful. You never can tell . . . statistics are never straighforward.

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  4. Hi David, this is a good article, but does raise the question why the recovery rate was (and still is) so low. Below 20p in the £? And why do you think it will get to 40p in the £? I was an early adopter of FC – but I haven’t used it recently because I have been disappointed with the recovery rate when loans go back.

    • Hi Bruce, we wrote a recent previous post on collections and recoveries that may help answer your question. You can find that here: https://www.fundingcircle.com/blog/2014/08/digging-data-collections-recoveries/

      Additionally, I’ve included a little more detail info below:

      As result of our growth the number of default will naturally increase, but the proportion should not. At the point of default the recovery rate on defaulted loans is zero, which presses down the overall recovery rate.The rate at which recoveries comes in is steadily getting bigger as we have more loans to recover on, which is as it should be.

      There is a time lag for recoveries, and this is why we review things on a six monthly basis. This project started in July 2014 and we ran another analysis, on the same assumptions but with more data, in January 2015. The analysis predicts 40p recovery across the whole book over the next 5 years on a rolling basis. For the July group the recovery rate was 10p (on an actual basis) and at January 2015 was 19p (on an actual basis). By July 2015 we anticipate that this group will have increased again.

    • Hi Ian, I’ve posted some detail below that provides further information about the recovery process. Hope this helps.

      • That doesn’t relly answer my question. Why have I only received a fraction of the %age recovery that you are publicising?

        • Hi Ian, It’s important to remember that the recoveries process can take years to yield results and there will be some instances where businesses are unable to pay back their loan when they fail. This is why we encourage all investors to diversify their investment across hundreds of businesses and to expect a 2% loss rate every year. This figure is shown in your summary page as the estimated fully diversified return.

          If you’d like to speak to someone specifically about your account, let me know and I’d be happy to arrange for someone in the collections team to give you a call.

          • Ok, that’s fine. I accept the 2% loss rate each year, I just don’t understand why my recovery rate is a fraction of the one you are advertising, it is misleading.

        • I have been with FundingCircle for 4 years now. Most of my worse bad debt experiences came from putting too much into one place early on, but now my recovery figures are slightly better than what Funding Circle quote above. They didn’t use to be as good as that.

          Also I have a separate account opened later with £250 of my money which is (from my point of view rather than anything official) put aside for a child, and have been more careful in how I lent, and have found that my bad debts are minimal and my rates of return higher.

          The screenshot below relates to my main account which used to have a few thousand in it. I don’t have that much in it now because I don’t have much spare cash right now.

  5. Those rates of return are over blown; I’ve been a relatively large investor; with over 100 loans in place, and my return is 2.5% with losses of £3,315. When I finally decided to give up and go elsewhere for a better return; it took me 3 months to sell my loans; that’s ridiculous! See the attached snippet for proof. Very disappointed.

    • Hi Brent. I am shocked by your details. I have been investing for about a year and as yet have had no bad debt . Could I know whether your bad debts arise after several years investment? Only trying to understand but how did you decide who to invest in? Auto-bid or deciding yourself? Do you have any knowledge of accounts? Be very grateful for replies which could genuinely help to improve our chances of success.

      • Hi beenthere; I have been with FC for about 2.5 years; after the first month of spending hours pouring over financials, comments etc and only winning a few bids I decided to turn on auto bid. I have pulled out most of my money due to the bad experience and have only about £26,000 left in (remember it took me almost 3 months to sell the rest; not a couple of days as FC states). Even now I am still getting bad debts – I’ve posted below the most recent, from last week.

        • Hi Brent Thankyou for the reply – genuinely helpful. It strongly suggests that autobid is to be avoided. Maybe I have to expect some bad debts coming as the debts get older. I have always investigated every investment myself, made sure every balance sheet was strong, profit pattern onioing, had a strict maximum of £60 (reduced to £20 where not totally convicnced). Bidding has become difficult though and not easy if you cannot be there for the last 10 minutes. It would take a while to get a large sum invested using my method, but Im up to about 350 investments as I say with no bad debts yet so its worked so far for me. Probably only sensible for old people like me with too much time on their hands!

      • Good Day folks, I had at one point 520 – loans with over 50,000 invested , after 18-months I realized that this type of saving account was probably not for investors with this sort of cash for the similar reasons you have stated, I have now removed 80% of my cash and reinvested in an asset backed lending P-2P with a strait 12% return and over a much shorter time period, an.y one with large sums to invest can find much better investments to fund with your money better protected

        • Hello Murr56 . Obviously your quoted 12% return got my attention! Couldnt point to it for me could you? Be really grateful – Cheers

      • I didn’t invest a lot of money into one business; it was a series of businesses that defaulted – as you can see above; it’s still happening and I’ve pulled most of my money out! I’ve kept a small amount in, hoping the situation will get better, but until I see a marked improvement I won’t be investing large amounts.

        • Hi Brent, sorry to hear you haven’t had an optimal experience. If you would like to speak to someone in the collections team about any specific loans, please let us know.

          • Hi there; yes please I would like to speak to someone in the collections team as I have checked the comments on some of the defaulted loans and there are some that have not had updated comments added.

    • Sorry you’ve had a bad experience. I’ve invested through FC for more than 3 years and never had a return of less than 7% after fees and bad debt. Currently 7.5% which contrasted with CPI at 0.3% makes me a happy bunny.

      • Although obviously I’m not familiar with this case… Almost every time I see someone whose experience with FC was bad, the sole root of the problem was that they invested in only a few companies and in very large chunks. If you really diversified into 100 or 200 companies then, just statistically speaking, you’d have to be freakishly freakishly unlucky not to make a decent return. “I bought a £2,000 chunk of debt and now no one wants to buy it” – buy in multiple £20 chunks if you must, since of course very few people are ever going to be willing to buy such a large amount.

        • I had a Funding Circle loans to several hundred businesses over several years and finished up with a gross return of 10.2%, which dropped to less than 1.3% return after fees, bad debts and tax on the gross interest. Yes there were a lot of bad debts, and recovery has been very poor. Funding Circle may have improved but still has a very long way to go.

          • I agree Richard; I know how sickened you must have felt only ending up with 1.3%. My losses are more than double the amount I’ve received in net earnings!

        • Hi Marcus, I was spread well over 200 businesses, with an average of £345 per business; which was the lowest amount the autobid would let me bid. I did everything FC and the forums recommended; I’m letting the community know my story because it is not as FC portrays it in these updates. See below; the small amount I still have in is still suffering from defaults; the most recent last week.

          • Fair enough Brent, I’m sorry to hear it didn’t go well for you, and, yes, thank you for sharing so we’re aware that it can go wrong. Best of luck with future investments and platforms!

  6. It’s a little reassuring to read about how FC is trying to improve this aspect, but there’s still a way to go. I invested £10K early on, which was intended to be a toe in the water. I’m not yet ready to put my foot in. From the start I decided to only invest in A+ and A rated loans, and these days I only look at A+. No-one’s perfect, but I suggest that if the rating is done properly an A+ borrower should only default because of a mass extinction event. In the same vein I was surprised to see how often, when a borrower defaults, that the guarantor goes down as easily as a Chelsea striker in the box. It makes me think that FC is happy to accept the borrower’s “mate down the pub” as a guarantor. Again, don’t forget that I’m talking A+ and A only.
    I wasn’t surprised @Brent took three months to sell his loan parts. Just to see how easy it may be to get my money out, I decided to try to sell a loan part (one of those that wasn’t blighted by a default). It didn’t sell. That’s why I’m putting no more money into FC.

    • Hi Brian, pleased you found the read helpful. I’ve included a couple of links below that may be of interest about the points you’ve raised:

      – on our stats page you can see full details of how many loans have been unable to repay by risk band. https://www.fundingcircle.com/statistics.
      – re. the ability to sell loans, Funding Circle is a marketplace, so access is dependent on there being a buyer for your loan parts. We’ve produced a separate data post on secondary market statistics that may be of interest. You can find this here: https://www.fundingcircle.com/blog/2014/12/digging-data-secondary-market/

      Hope these are useful. If you would like to discuss any defaulted loans in particular, let us know and we’ll arrange for one of the team to contact you.

      • I really don’t understand, FC, how you can say that the average time to sell loans at par is 7.5 hours. As I stated in my comment above, it took me 3 months to sell 75% of my loans; and this was after I relisted at a discount as they just weren’t selling at par.

  7. The amount lent by Institutions is shown as a very large part of the total. Presumably the amount lent by Institutions is in the form of Whole Loans which are not available to “normal” Peer-To-Peer lenders.
    Are the gross rates, defaults, recoveries etc. the same for Whole Loans as for the Partial Loans?
    Do the figures you show above include all loans i.e Whole and Partial combined?

    • Hi Angie,

      You’re correct. Institutional investors highlighted above are purchasers of whole loans, which is not open to individual investors. The figures on gross rates, defaults and recoveries are representative of all loans on Funding Circle – both whole loans and partial loans.

      D

      • What does “…..are representative of all loans- both whole and partial” actually mean?
        I have based my lending decisions on figures published by FC in the belief that those figures were the actual figures for the loans that I was able to bid for, not just representations.
        Why do you distort the returns that I am able to obtain from partial loans with those obtained by institutional investors? I can only think that something is being hidden. I do not believe for one minute that you treat me and my £20 loan part equally with the institutional investor with a £k+ whole loan.
        I have as yet no criticism of my returns relative to those available elsewhere but as soon as financial institutions become involved I loose all trust in a fair deal.
        No financial institution is going to accept “representative” figures for their investments so why should individual investors? Whole loans and institutional investors is not what I believed FC P2P lending to be all about.
        Will you please in future publish figures which are accurate for each of the loan types.

        • Hi Angie, the rates you see in this blog post and across the site are the rates you can earn. With whole loans the interest rate is a fixed price and this is decided by the interest rates that investors set on partial loans The rate is calculated by taking the average rate for partial loans of the same risk band accepted in the last 14 days. What this means is that institutional investors who buy whole loans do not receive any preferential interest rates over individual investors.

          We have just started to provide more detail about the number of whole loans and partial loans in the Weekly Lending Review. You can also see in the loanbook every single loan that has been accepted, and whether this is a whole loan or partial loan. If you’re interested you can find this information at the bottom of the statistics page.

  8. The C and C- bands are artificially increasing returns, it’s only better for investors if they don’t pay income tax or if they pay CGT and can deduce their losses from CGT, and even then, it’s not great.
    I have sold all my C and C- loans and rebuilt my loanbook and my after tax return went from 2.4% to 4% (7.3% before tax).

    Read more about it: https://forum.fundingcircle.com/forum/all-about-funding-circle/community-suggestions/633-return-after-tax?9988-Return-after-Tax=

  9. Hi Brent, we have had to delete the image attached to your comment as it gives borrower details which are not available to non-registered investors. Here is your original comment:

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  11. In my opinion there are a few things misleading with these conclusions. I have performed some research on this since joining FC as a lender fairly recently. Such a market place is a good thing, but we need to be clear on underlying statistics. When I personally looked at the loan book history and cut things in a different way from the statistics page I reached slightly less optimistic conclusions.

    To state what I think should be obvious: over the lifetime of loans on Funding Circle, the UK has been moving away from a recession. Hence when you look at the history of loans there is a cluster of defaults at the start of the loan book.

    In reference to the items above:

    (1) Introducing new risk bands has enabled investors to earn higher returns.

    No, I don’t believe it has. The risk bands were introduced in 2012. If you look at FC’s own graph on defaults by year of origination you’ll note it was in the earlier years there was a higher default rate than expected. So the new risk bands have simply suffered less defaults, since they represent a growth period in the UK. That doesn’t mean to say another recession will never occur. When it does the actual defaults will be far higher than the expected.

    (2) The introduction of Minimum Bid Rates has gradually increased gross interest rates.

    This is almost certainly true: you put in a minimum rate and the average should increase. How many people were previously bidding below the minimum rates? I think this point should be an argument that FC is taking some fairly basic steps to protect investors, which I would welcome.

    (3) We’re improving our ability to manage the supply and demand of the marketplace.

    Ok, but I hope all new investors know what they are up to, and the whole process of introducing new investors is not going to be in anyway misleading.

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