How investor returns change over time

To help guide you on what you can expect from your lending experience, we wanted to show how a typical investor account could perform over a five-year period.

Performance over time

At Funding Circle, we show projected returns for both of the lending options available to investors. These are the annual returns investors could expect to earn once loans have been repaid. 

However, we don’t expect you to arrive at your projected return right away. During the course of your lending, your return will change. It will be affected by bad debt (businesses being unable to repay loans) and the recoveries you may receive (funds recovered from defaulted loans). Recoveries can take years, and the effect of bad debt is usually concentrated in certain phases. 

The below chart shows the typical stages a return will go through over a 5 year period. In this example, an investor has lent across all new loans taken out between 2012-2014, without reinvesting repayments. 

Phase 1 – Returns are at their highest initially

For the first few months the return is at its highest. This is because very few borrowers have been unable to repay their loans in the first 6 months.

Phase 2 – Bad debt causes a dip

We robustly assess every business you lend to, however, there will always be a small proportion who are unable to repay their loans in full. This is called bad debt. It can occur anytime, but it has the biggest effect between 6-18 months after lending starts. As you can see on the graph, it usually causes returns to dip during this period.

Phase 3 – Returns improve as recoveries and interest take effect

Although Phase 2 can be alarming, as you can see on the graph, typically returns pick up again. Although you will likely still experience bad debt, you’ll start to receive recoveries on some of the unrepaid funds and compound interest helps to boost your return over time. 

Think long term to get the best return

It’s important to accept bad debt as a normal part of lending. In most cases it will cause a dip in your return, and potentially some bumps along the way. However, by thinking long term, you can still earn attractive, inflation-beating returns.

The above chart is based on loan performance data over 5 years for all loans taken out between 2012-2014. As you are lending to your own portfolio of loans your return may differ. Past performance is not a guide to future performance and capital is at risk. Not covered by the Financial Services Compensation Scheme. 

Jack Pritchett

Senior Communications Manager


6 thoughts on “How investor returns change over time

  1. Interesting that annualised return isn’t greatly different for 800 loans compared to 200. I guess the main benefit above 200 comes from smaller overall volatility, the other side of the coin so to speak. Plus the ability to build in a small proportion of lower rated/higher potential return?
    Starting to hit early phase 3 with my earliest loans, reassuring & very insightful article as always.

  2. 60x £100 is £6000. And the interest would also be significant. Yet the 5 year projections, have less than that difference between the two reinvestment projections, with and without £100 additions.

    • Hi there, the example investor set up their standing order in January 2013, so there are 48x £100 contributions rather than 60. Thanks.

      • Ah, I see. I’m used to my science studies, where graphs need to stand alone, as well as be contextualised in the text. Cheers.

  3. Nice analysis. I’m just coming out of Phase 2 – but didn’t realise it was a finite phase. Seeing regular defalts has been a bumpy and distressing ride, so it’s comforting to discover it’s “only” a pahse, and that the projected recovery rate is 44%

  4. So you are telling me, that if I will be regularly sending money to my investment account I will have more money there in the end. Impressive.

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