Aren’t Banks Fantastic?

Everyone loves banks. They keep our money safe, lend it to farmers and small businesses, and pay us an attractive rate of interest too. The economy grows, everyone gets wealthier. Wins all around! Three cheers for Mr. Coinage, our friendly local banker!

I should totally write this...

I should totally write this...

Oh, wait – it’s not 1955 anymore? No problem. Banks still lend money to small businesses, right? No? But I thought… At least we get interest on our savings! Huh? Nought point one percent? Is that even a number? So what DO they do with our money? They do WHAT?!

Everyone hates banks. They feed us shit about ‘building an emotional world for their customers’ then charge us 20 pounds if we go a penny overdrawn. Gah! Don’t even get me started. Let’s skip to the good bit:

You need a bank account to get your salary, to pay bills, and all that guff. But if you’re looking to make your money work for you, if you want your money being lent to businesses and people who need it, there’s this thing called Peer-to-Peer lending.

It'll make you richer and it'll help take control of the economy out of the claws of those dastardly fat cats. Sounds like an article worth reading, doncha think?

What is Peer-to-Peer Lending?

Imagine there’s a company in Middlesex that wants to buy a new piece of equipment so they can grow. They need 20,000 pounds. The bank says no, because they need that money to pay bonuses. And that’s the end of the story.

Or – that’s how it used to be. Now that company can borrow money from people like you and me. It only takes a thousand people lending 20 quid to buy that machine. It’s made possible, of course, by the internet. In the past it would have been stupidly expensive to get money from a thousand people and the paperwork would have taken months. Now it’s all done in an instant at almost zero cost.

How Risky is It?

Have you ever lent someone money and never seen it again? It happens with your mates and it can happen with loans to companies.

You have to think in the aggregate – if you lend to 100 businesses, how many are shady? How many are on the verge of collapse? How many are run by complete idiots? Let’s say ten. The question is will you make enough profit from the other 90 to make up for your losses?

The answer – yes. (Plus the peer-to-peer websites have trained employees whose job is to keep the number of failed loans as low as poss.)

If I Understand This Correctly, I Make a Bunch of Small Loans and Though Some Will Fail I'll Still Make Money?

Right. So let's dive into sites that I have personal experience of.

A Quick Note About AMERICA

I use P2P sites based in the UK. If you’re lucky enough to live in those United States, check out this post by Nick Loper and this one by Mr Money Mustache.

Sites I've Used and Recommend

1. Zopa – 3.5 to 6.7%

Zopa is the biggest name in the UK peer-to-peer lending scene. They lend to normal people like you and me. Lending is almost totally automated – you fund your account, choose the return you want, and that’s it. You can even choose to automatically re-invest your profits. Really easy.

I signed up when I first heard about it, in 2008, but never did anything with it. It wasn’t until the start of 2015 when I threw 40 pounds in there to see what happened. At various times I’ve chucked in a hundred here and there, so now my capital is a whopping 260 pounds.

In March 2016 they changed their structure. Now, there are 3 bands:

A low 3.5% rate that doesn’t have penalties if you need your money in a hurry; 4.5% with a fee if you sell your loans before their time is up; 6.7% if you want something riskier. They recommend putting in at least a thousand pounds so that your risk is spread.

Pros –

  • safe
  • okay returns
  • foolproof
  • you’re helping out your fellow man

Cons – 

  • 5-year loans
  • general lack of sex appeal

If you want to sign up, use this link and I might get a few bob.

2. Funding Circle – 8 to 17.7%

These guys are the go-betweens ‘twixt you and British businesses. They broker loans for property projects too. Loans are negotiated by their experts and put into risk bands from A+ to E. You get a short profile of the company and what they want the money for, plus some financial details. There’s a page where lenders (you) can talk directly with the company. If you have time you can pore over these details and decide for yourself if the company’s plan seems reasonable. Businesses are spread out all over the country.

The loans are interesting – you get medical companies who’ve just landed a new contract with a hospital, a business that wants to refinance a more expensive loan, and once I was able to invest in the latest Broken Sword computer game.

I’ve got more than 4 grand in, and the return is niiiice:

The gross yield is what I’ve actually made so far before losses and costs, and the estimated return (the last one) is what they expect I’ll make if some more debts go bad. 

Pros –

  • good returns
  • simple, elegant platform
  • you’re investing in British business
  • the British government invest via Funding Circle too

Cons – 

  • You do have to log in now and then to choose who to relend to (actually I just remembered there’s an auto-bid tool – I don’t use it because I like to make my own decisions)
  • you do rack up ‘losses’, which is scary at first

Sign up here, but if you can drop 1,000 pounds in, write to me and I’ll send you a ‘refer a friend’ link – we’ll each get 50 pounds! BONANZA!

3. Saving Stream – 12%

A fixed monthly return of 1%? Yes, please! They offer bridging loans to property developers (normally a cash cow for banks; now we can get a piece of the action!). It’s a sweet deal because if the builder doesn’t repay the loan, the company (i.e. you and me, indirectly) takes ownership of the land. Mostly that doesn’t happen because these developers are good at maths, but if it does it’s quite likely that the worst case scenario is you have to wait a while to get your money back. To mitigate the risk even further, Saving Stream created a ‘provision fund’ to offset losses.

Here’s what the deals look like.

See the ‘loan to value’ number? As a lender, you want that number to be as low as possible – Saving Stream never go above 70%. In plain English, it means the property on the right could be sold for 2.4 million pounds. If that developer didn’t pay the loan back you’d instantly gain 2 million. Whaaaat! Rest assured the builders are highly motivated to pay the loans back.

Really the only problem is that demand exceeds supply and if the loans fill up quickly your money will be sitting around doing nothing. When your money is put towards a Saving Steam loan, it’s working hard; when it’s idle, it’s idle.

So far my 600 pounds has grown to 640, and I haven’t been doing it for very long.

Interested in Saving Stream? Sign up below and they’ll give me a kickback. It’s better for me if you chuck your life savings in there, but maybe you want to dip your toes in with a thousand pounds or so.

Pros –

  • amazing return
  • really nice website (I wrote to ask what they used to make it; they didn’t want to reveal their secrets. Bah!)
  • good communication from management

Cons –

  • have to be on your toes to get loans
  • limited number of loans compared to the other two platforms

Okay, those are the 3 platforms that I’ve tried. I’m happy with all of them in different ways and have no hesitation recommending them. Just remember that you need to put in enough money to diversify your loans. If you spread your money out over enough loans, you’re really guaranteed to come out ahead. I would have put more money into all 3 if I hadn’t started buying websites.

I’ll update this article every now and then with my latest performance details.