Fixed interest rate loans – important Funding Circle update

As you may already be aware, we sent a letter and Q&A to all active Funding Circle investors today announcing that we will be moving to fixed interest rate loans within the next month.

Below is the letter and you can read more about these changes on our fixed interest rate webpage. To download a more detailed Q&A about the changes, please click here.

We appreciate this is a big change but we believe it is a necessary step towards building the most successful marketplace for our customers. We would be grateful for your feedback to help us in the next stage of our journey.

The Funding Circle team

……

Fixed rate letter from Samir Desai, CEO and co-founder of Funding Circle

Since we first launched Funding Circle our goal has been to enable investors to earn attractive, stable returns and to help small businesses access finance quickly at a fair, transparent price.

Recently, we have been reviewing in detail how Funding Circle operates, with a view to providing an improved service for both investors and borrowers. We have found that the current auction model has significant drawbacks, which we believe can be improved to give investors and borrowers a better experience, and ensure the long term sustainability of the marketplace.

After careful consideration we have taken the decision to move to fixed interest rates for all loans within the next month. I appreciate this is a big change, which is why I wanted to write to you today.

What’s the challenge with the auction model?

The auction model has existed since Funding Circle first launched in 2010 – enabling investors to choose the interest rate they wish to earn and the amount of money they wish to lend.

Whilst I know many investors have enjoyed the auction model, there are a number of disadvantages with it:

  • Auctions tie-up investors’ funds: auctions typically last 7 or 14 days. During this time your money is not earning any interest and your bid may be knocked out by a lower rate. This means that investors may bid multiple times during an auction, with no guarantee their bid will be successful.
  • Confusing and complex to understand: many investors tell us they want a simple, easy way to lend their money. Auctions can be confusing and unattractive, especially for new investors.
  • Unattractive to borrowers: many business owners are put off by the lack of certainty around the cost of their loan.

How do fixed interest rate loans work?

Fixed interest rate loans are where Funding Circle sets the rate based on the risk of the loan and all investors achieve the same interest rate. We already operate fixed interest rates for property and asset finance loans.

The interest rate is based according to the risk of the loan, rather than the availability of investor funds. The rate is set before a business is listed and it is published on the marketplace for all investors to see. Rates will be set according to the risk band and the length of the business loan.

By setting the interest rate before a loan is listed on the marketplace, there is no need for the traditional auction. Loans will fund and be accepted by businesses more quickly, meaning your money is working harder for you.

Benefits of fixed interest rate loans

  • Simpler and easier to understand: if you like a business you can bid knowing your offer rate cannot be knocked out by other investors.
  • Your money works harder for you: by giving borrowers certainty of rate we expect businesses to accept their loans faster than they currently do, meaning your money is used more efficiently.
  • More businesses to lend to: certainty of cost means more businesses will apply to Funding Circle, creating more lending opportunities for you.

How will this change affect me?

We believe this move is in the best long-term interest for the Funding Circle marketplace. For the majority of investors, fixed interest rate loans will deliver a better service and higher returns. From our analysis, if the new fixed interest rates had been introduced at the start of last year, 71% of investors would be earning a higher expected return. To help plan for the launch of fixed interest rates, we are releasing the new rates to all investors today. You can see these on the Q&A page attached with this letter.

We have taken this decision in the interests of the majority of our investors and the feedback we have received has been positive. 90% of you have previously told us that you would increase or maintain your investment through Funding Circle if more fixed interest rate loans were introduced.

We recognise, however, there are a group of investors who actively use the auction model to earn above average returns, and who will be unhappy with this news and whose overall return is likely to drop as a result. We hope those affected will still consider that they can earn an attractive return at Funding Circle and continue to lend through the platform.

How can I provide feedback?

This is a significant change to how Funding Circle operates. We want to be open with all investors and provide the opportunity to ask questions before we make this change.

Below are details about how you can be involved in the process:

  • Investor evening: this will be held on 17 September and primarily focused on questions about fixed interest rate loans.
  • Webinars: we will be hosting regular webinars to answer your questions. We will provide further information about these on the blog, forum and in your weekly email newsletter.
  • Written feedback: investors can provide written feedback, found at our fixed interest rate webpage.

If you would like to join any part of this process, please email us at community@fundingcircle.com.

This is a big, but necessary, move to continue to build Funding Circle into a successful, mainstream business. I hope this letter provides you with further information behind this important change and we look forward to answering any questions you have.

Yours sincerely,

Samir Desai

CEO and co-founder, Funding Circle

News

Natasha

Head of Corporate Communications

 

11 thoughts on “Fixed interest rate loans – important Funding Circle update

  1. You say “With the new fixed interest rate structure stated above, we expect the current estimated return after fees and bad debts to remain stable at approximately 7%”
    With the rate quoted as 6.0% for risk A+ loans with 6-12 month duration, I think I’d call that a lie. Your own Autobid tool says that 6.0% ‘gross’ should deliver 4.4% net return after 1% fees and 0.6% annual bad debt.

    • Hi Clive,

      6-12 month A+ loans make up a very small proportion of our overall loanbook (about 1% of all loans) and we haven’t yet seen any defaults to date for this group. Short term loans are typically very competitive in the market and this is what we feel the price should be to attract these types of borrowers.

      If you compare 24-36 and 48-60 month loans across risk bands the rates are comparable with historic averages.

      Average rates (excluding property) by credit band since 2014 are:

      A+ 8.2

      A 9.3

      B 10.3

      C 11.4

      D 12.9

      And since 2015 (excluding property)

      A+ 8.1

      A 9.2

      B 10.2

      C 11.3

      D 13.1

      E 18.2

      • I wasn’t asking how you decided on 6.0% for A+ 6-12 months.
        The point is that you’re basically “advertising” to potential lenders that they can achieve 7.0% on all loans. That isn’t true. The only thing that’s stopping me reporting you to the Advertising Standards Authority is that I’m not sure they cover online pages especially for financial products.

        • Hi Clive, the headline figure on the homepage is is calculated by the gross interest rate minus fees and expected bad debts that will occur in the future for each of the last 100 loans accepted on the marketplace. The overall expected return on Funding Circle will remain stable at approximately ~7% when fixed interest rates are introduced.

  2. Business Owner,

    This is Mary from Apex Capital Source. We provide Cash Advance and long term Loans. We are Direct lenders, not brokers. Our customer service and practices are more geared toward helping our clients achieve the best possible service in the industry.

    We can help fund your business within 1-3 business days.( Cash Advance ). There are different options available with our company that might not be an option elsewhere. If you have a recent / current loan in place, we can refinance that loan and get more capital as well as lowering your payments. We work closely with an investor who can offer an SBA Loan, Traditional, Asset-based Loan, etc at a very low interest rate. I will work diligently to get you the best offer possible.

    To start, I will need the following documents:

    1-Attached Application signed
    2-Bank Statements-Last 4 months ( Every page )
    3-Credit Card Statements- Last 3 months ( Every Page if Applicable)

    If you are not seeking a cash advance, but rather something larger and long term I can help you receive that as well. If all the criteria fits we can also do weekly and monthly payments instead of daily payments.

    We are offering competitive rates and we do our best to get you exactly what you are looking for. Whether its low daily payments, a certain amount, or anything else I will do my best to get you exactly that.

    If you have any questions please do not hesitate to contact me anytime by either my office or cell.

    Best Regards,

  3. First you kill off the secondary market and now this. It’s easy to see where this is heading. Why not just go the whole hog? Take away our ability to choose to whom we lend, prevent us selecting risk bands, just take our money to lend out as you see fit to anoymous borrowers at a fixed rate of return that only varies by term, call yourselves a bank and have done with it? Whom do you imagine you are fooling?

    Your description of the ‘problems’ with the auction system are pure sophistry. You disgust me.

    • Hi Elyss, we passionately believe in investors being able to lend their money directly to businesses in the UK.This form of direct lending is what makes Funding Circle very different from a bank. We are committed that investors will still have time to review individual loan applications as we grow.

      • Just as you were once committed to the market finding its own level by investors and borrowers agreeing on rates? You have a nerve, and conveniently short memories. Ah well, at least you managed to hold out for a little while before money and greed corrupted you. The only thing you passionately believe in now is the size of your own bank balance. I’m done with you.

  4. This is a fundamental change to be launching in such a short timescale. Especially completely withdrawing the “auction” product rather than increasing the fixed loans in parallel (which would allow everyone to see what happens in practice). The announcement process seems to be a fiasco (is this FCA best practice?), with rather glaring questions such as Clive’s below and how autobid will work unaddressed, and the administrator on the “Community” making some very bold statements (are these official announcements/ undertakings? or his speculation?) Meanwhile the poor lenders are trying to make some possibly big financial decisions in an information vacuum. (Most jawdropping is administrator’s defence of the change, that investors said they wanted some more fixed rate loans! It
    would be funny if it were someone else’s money)

    • Hi LAR, Fixed interest rate loans won’t launch for another few weeks. We have tried to give investors as much warning as possible. We feel the decision to move to fixed interest rates is the best overall decision for the widest group of constituents. We strongly believe this is the best option for the investors, borrowers and the business.

      We’ve include details in our response to Clive’s post about how the fixed rates are set. If you have further questions on this, please feel free to email us at commmunity@fundingcircle:disqus.com

  5. I think it’s reasonably safe to assume that FC would not be implementing this
    change if it were anything like as reliant upon retail investor money as
    it was probably even as recently as a year or two ago.

    I also feel that as far as peer to peer lending as a whole goes, the best times
    and returns for small (consumers) investors are already consigned to
    the past. The game is changing fast and it surely won’t be too much
    longer now before the institutions – and dare I say it the banks? – are
    all over it.

    So, next Monday the risk profile for lending here changes dramatically as
    far as I am concerned and the more I think about it the less inclined I
    am to continue lending on *unsecured* loans at the fixed rates above.
    We’ll see.

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