Your fixed rate questions answered

Following feedback from investors over the last few days we have put together a list of the most frequent questions and answers that have been raised. If you would like to join the investor evening on 17th September or webinars that are taking place over the next few weeks, please contact us at community@fundingcircle.com.

Information on the marketplace

When will fixed interest rate loans launch?

Fixed interest rate loans will launch the week commencing 28 September.

With the introduction of fixed interest rate loans, will I still be able to review a business’s details on the marketplace, or will Autobid, or investors running automated scripts, fill up the loan immediately?

Funding Circle was built so investors could have the opportunity to review individual businesses and decide if they want to lend to them based on their own preferences. We are committed that investors will still have time to review individual loan applications as we grow. Autobid has a 65% cap on all new loan requests it can fill. 35% of all new loans will be available to manual bidders.

We are aware of certain investors using automated scripts. We continue to monitor the marketplace and if we feel any individual investor is disrupting the marketplace we will take action.

Can interest rates be changed mid-term?

Once a business accepts their loan request the interest rate is fixed for the term of the loan. This is how loans have always operated at Funding Circle and will not change with the introduction of fixed rates. All loans already in your portfolio will remain at the same rate for the full term. Repayments will operate in the same way they have previously. For all loans, except certain property loans (those marked as ‘interest only’), investors will receive capital and interest repayments on a monthly basis.

Changes to fixed interest rates

Do rates include a provision for a potential interest rate move in years to come?

As part of setting the new fixed interest rates, we take into account forward looking expectations of interest rates over the next five years. This is why you will see the longer term loans are higher rates.

The fixed rates you have published are below the average rates seen over the last 100 loans.  Why is this?

August is typically a month where interest rates increase due to the holiday season. This is a seasonal trend. We have published below the average rates from the start of 2014 and 2015, (excluding property) and you can see that the fixed rates for 24-36 and 48-60 month loans are comparable with the new fixed interest rate loans. The majority of investors will achieve more attractive gross interest rates under the new model.

Fixed rate table

 

Why are 6-12 month A+ loans only 6% fixed interest rate?

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 the rate is what feel it should be to attract these types of borrowers.

What happens when ISAs become available. Won’t the rates will be driven lower because of higher demand?

Typically the majority of ISA money is deposited over a short period towards the end of the tax year. With an auction model this volume of money would have depressed rates over that period given the influx of capital. This will not be the case with fixed interest rate loans.

Why not offer both models, fixed rate and auctions, and allow investors and borrowers to choose their preferred method?

Businesses are looking for low cost finance which is quick to access. They will only accept a loan auction if the rates are lower than the fixed rate for their risk band. Therefore we believe that rejections would increase under an optional auction/fixed rate model.

Why are you taking away all of the fun and turning into a bank?

We passionately believe in investors being able to lend their money directly to businesses in the UK. This 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.

Were investors consulted on this before? Why won’t you launch as a pilot first?

We try to engage with investors as much as possible and listen to feedback. Where we feel suggestions are practical and can help improve Funding Circle we try and implement these. Unfortunately there will be times when significant business decisions are made that will not be communicated to investors before the decision is taken. We have monitored fixed rate loans at our US business and our property loans, and we believe they will be successful here in the UK.

Time investor money tied up

Will fixed interest rates mean borrowers accept their loans quicker?

The current average time it takes for a loan request to be accepted is approximately 7 days. We expect it will be faster with the introduction of fixed rates. All fixed interest rate loans will be listed for 7-14 days or until the borrower chooses to accept the loan. In the longer term we will be looking to implement a system where borrowers can pre-accept their loan and are automatically removed from the marketplace when their loan is 100% funded. As a result of the move to fixed rate we expect rejection rates will drop as borrowers have a certainty of price, which will help investor money to be used more efficiently.

Property

I like property lending. What plans and/or changes do FC have for property loans?

There are no plans to change how property lending operates on the marketplace.  

Borrower related questions

Won’t borrowers just refinance when loans rates have dropped?

Borrowers can already do this today when rates fall at times in the year, but we don’t see this as an attractive option because of the additional fee the business would incur.

Autobid questions

When will Autobid start buying discounted loan parts?

This change will be made tomorrow and Autobid will start purchasing discounted loan parts immediately.

I use autobid.  Do I have to do anything in the context of the new system?

If you use Autobid to lend to businesses then you may wish to update your settings when fixed interest rates launch.

Going forward:

  • Autobid will lend on all loans within risk bands you have selected. The gross interest rates stated above will apply for the majority of new loans, excluding property, where rates may vary.
  • Your current Autobid settings will remain in place for buying loan parts from other investors on the secondary market.

Rob McCorquodale

 

10 thoughts on “Your fixed rate questions answered

  1. When Zopa did exactly this a few years ago the reality (I know, I lend there) was that investor returns dropped significantly. They also spun it as a huge boost and massive positive. I stopped lending there and moved to FC, only to see the same thing happen again. Where next?

  2. Whilst I am willing to see how this pans out my initil reaction is to see moving to a fixed rate model as a disappointing development and despite the positive rhetoric find the fixed rates to be much lower than those I am currently lending at. I also find it quite laughable that the embryonic US model is quoted above as one of the drivers of the move to fixed rates.

    I also concur with Ben’s comment. Circa 2009 Zopa began implementing all manner of changes without consulting members which resulted in me transferring the majority of my p2p loan book to RateSetter & Funding Circle. Zopa have since back-tracked on a number of those changes but it was by then too late for them to regain my business.

    Zopa also expanded into the US around that time and ended up getting a bloody nose. I sincerely hope that FC doesn’t end up going the same way.

  3. Both FC and Zopa don’t recognise lenders as active participants in the market, and therefore don’t consult with them. They are entirely focused on attracting and serving borrowers. Unfourtunatly without lenders there will be no borrowers. FC will no longer be peer to peer it will be a publically funded bank. Good luck with it, I’m with Ben and Gary on this. I’ll wait to see how it plays out, predicting a reduction in lender rates and an increase in FC’s profit. Some organised collective action… a lender strike would put this to bed within days. Should we do it?

    • I suspect that as long as FC can increase the value of loans they process, they’re fairly insensitive to the rate the loan gets funded at. With an increasing amount of what I assume is institutional money funding ‘whole loans’, and the thought that fixed rates will attract more borrowers (and hence increase the value of loans), they can probably ignore the small percentage of miffed individual lenders. Sad for those of us affected, but if it helps their business scale I can see why FC want to do it. What I object to is FC pretending they’re doing it for our good, they’re not, they’re doing it for their good.

    • Yes a lender strike sounds like a good idea. The reason F.C. can do this is because we are not acting collectively.

  4. Thank you for this information.

    I’m not 100% convinced about this, but I’m not ready for a lender’s strike either. I’m going for the hold option.

    I feel like there has been a certain amount of false positivity in your well meaning attempts to assure investors. I think sincere answers will be more appreciated than claims everything is perfect. I suspect that the majority of investors understand that there will be changes and FC has business decisions to make which will have positive and negative implications for them.

    Something I hope you can help us understand is the implications of fluctuating supply and demand on investor money. You state that if there is a glut of investor money from ISAs, this will no longer depress interests rates as interest rates are now fixed. If price isn’t reduced with supply, could this mean money will remain unlent?

    You say there are seasonal fluctuations in supply and demand for new loans, with interest rates peaking over the summer. How will fixed interest rates react to these changes? Will investor money build up unlent during the year and only be lent out when supply falls or demand increases with the season?

    You say that the fixed rates account for your predictions for BoE changing the interest rate. This is notoriously difficult to predict. Also, as we enter the future you have predicted, there will be a new future. BoE rates are also not the only external pressure on FC rates. How often will these fixed rates be reviewed?

  5. I feel a lenders strike would be pointless in any case, as 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.

    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.

  6. Is it me or has the new fixed option killed the market. There is no time to review the business wanting “OUR” money before the autobid system has filled every request. People are just throwing money in the pot….I like to review and make an educated decision. How long before people are complaining when their losses mount up. I want to invest not gamble.

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