Collateral P2P Review
** Collateral p2p review updated April 20th 2017 **
Collateral is one of the newer entrants in the peer to peer lending space. I began investing in Collateral’s p2p loans in June 2016, only one month after they launched. Collateral offers lenders 1% monthly returns on secured peer to peer loans. Loans are secured by items such as jewellery and cars. While Collateral’s p2p track record is short, their loan book and lender registrants have grown quickly filling the pawn lending void that Funding Secure and Moneything cultivated.
My April 2017 Allocation: Unchanged
My current annual rate of return: 12% (After fees but before tax)
* This opinion risk factors in loan types, interest returns, platform history, default numbers and my own investing experience.
The Collateral P2P Review – The Important Info:
- Good lender return rates – usually 1% per month
- Pawn style loans on easily recoverable items such as jewellery
- Buyback agreements with loan partners in the event of default
- Good influx of new loans
- Prefunding on new loans
- Bidding limits
- Secondary market for loan resales
- Staff communication has been stellar
- Higher risk
- Younger company with short track record
- Limited item valuation information
- Untested default handling
Collateral P2P Review: My experiences so far….
When I first learned of Collateral’s pawn based lending business model, I became interested because both Funding Secure and Moneything are offering less of these types of loans. So far, everything has been smooth sailing and interest payments have been received on time. The staff communication has also been very good. Loans are much harder to buy now since lender demand has vastly increased.
What Is A Collateral?
Collateral is a UK based peer to peer lending company specializing in pawn style loans ranging from jewellery to cars. They also offer alternative loans on items such as artwork and property but jewelry remains their focus.
How Can I Contact Collateral?
UK Tel: 0161 413 6003
When Did Collateral Launch?
The company launched in 2014 but started offering peer to peer loans to lenders in mid 2016.
Are They Regulated?
Yes. Collateral is regulated by the Financial Conduct Authority #656714 under IP issued status. This means Collateral is under interim permission much like most peer to peer lending companies. FCA regulation is nothing like the FSCS (Financial Services Compensation Scheme). FSCS covers consumers when they deposit money in banks, the FCA does not.
The FCA does have the ability to pursue criminal action against companies which violates its standards. The FCA is not a government entity and it’s funded by the very companies it regulates.
How Do I Sign Up / Any Offers?
Click here to sign up. Currently there are no cashback offers.
Who Can Open An Account?
Collateral uses a third party identity check company. Anyone who passes the check receives immediate access to the website. Those who fail the check may need to provide additional documentation to prove identity. Once those documents are verified, an account can be opened.
Collateral accepts overseas investors. While having a UK bank account is preferable, it isn’t mandatory.
What’s the Signup Process Like?
Because I’m a financial ninja and my identity is shrouded in mystery, I was required to send in additional documentation to prove my worth. The process was relatively easy and my account was opened within a couple of days.
How Are Deposits Made?
Via bank transfer. The website states card payments will be available soon.
What’s The Minimum Deposit / Investment?
Deposit: No minimum
Loans: No minimum
Does Collateral Offer An Innovative Finance ISA?
How Much Interest Does Collateral Pay Lenders / Investors?
Is Interest Paid Immediately Or When the Loan Starts?
Interest accrues immediately on purchase.
When Is Interest Paid?
Payments are made on the first of each month.
Am I Lending To The Collateral Platform Or To Borrowers?
I presumed all loan contracts are between the investors and borrowers but Collateral has Buy Back Agreements on certain loans where Collateral actually owns the secured items. I question whether lenders would be legally loaning money to Collateral on these Buy Back item loans. I’m currently obtaining Collateral’s clarification on this and will update this section soon.
What Are The Fees?
There are no lender fees.
What Are The Length Of The Loans?
Most loans are between six months and one year in length. Borrowers can be renew loans at the end of the term and loans can be paid off at any time.
What Security Does Collateral Loan Against?
All loans are secured by the items lent against. Most pawn items are stored in a secured area controlled by Collateral.
Collateral now offers group asset loans secured by debentures over jewellery items. The borrower has these items for sale so the items are not be held by Collateral. As an item sells, the retailer will be replace it with an item of equal value. Collateral’s group assets loan will be similar to Moneything’s group asset loans.
Group asset loans are convenient for lenders because when the loan ends, it is likely to continuously renew. This means lenders don’t have to find new loans to put their money into.
The downside of group asset loans is debentures aren’t easy to collect upon in the event of a default. Debenture collection can be legally costly and time consuming. Group asset loans could be considered more like a standard loan given to a business rather than a pawn loan.
What Are The Loan Default Rates?
This information isn’t posted on Collateral’s website but I will post if I obtain.
What Is Default Handling Like?
So far I’ve yet to experience a default so I can’t comment.
Is There a Secondary Market?
Yes there is and lenders can sell loan pieces anytime for free.
What Are The Main Risks?
Platform failure: Collateral is a newer peer to peer platform so its lack of history adds to the investment risks lenders face. Should Collateral cease trading, lenders could face capital losses.
Defaults: Since Collateral hasn’t experienced many defaults, I’ve yet to experience how effective their default handling process is.
Valuation errors: Collateral seems to have a good understanding of jewellery valuations, however a valuation mistake could lead to losses on resale. Valuations are provided by third parties but information provided to lenders is limited.
Gold price volatility: Collateral’s loan to values are based on wholesale values which is a good thing. However gold prices can be volatile and if they were to drop, pawn item values would also fall. If defaults occur during a drop in gold prices, the pawn items may not be sold for enough money to recoup lenders capital and interest.
Lowering of underwriting quality: If Collateral lowers its loan requirements then the quality of loans will decrease resulting in greater default risk.
Is There A Provision Fund?
What Happens If Collateral Goes Bust?
Quoting Collateral’s Terms & Conditions: “If Collateral ceases to trade, a third party service provider would take on service obligations”.
There aren’t any details on the provider or how collections and repayments would be made. As I’ve said on all of my previous reviews, if a peer to peer lending platform fails, there are too many unknowns to predict outcomes and lenders could lose their capital. This is the risk of peer to peer lending.
WHAT I LIKE ABOUT COLLATERAL:
In the era of low interest rates, a 1% monthly return is very attractive.
I like lending against jewellery as it’s a business I understand. My dad owned a jewellery shop and entered into the pawn business at the end of his career. The beauty of pawn items is that unlike property, if a borrower defaults, the items can usually be sold quickly depending on valuation accuracy and demand.
Defaults are inevitable so Collateral’s p2p long term success will be tied to its ability to quickly sell defaulted items to recoup lender capital and interest. Inability to recover on defaults is a quick way to lose investors confidence.
New Loans Are Frequent, Sometimes
When Collateral launched, new loans were offered daily but since then, supply has lessened. For now I’m presuming this is because of the holidays and the new year will see an increase in new loans. Lenders are notified a day before loans are posted.
Collateral now offers loan pre-funding. This is a nice addition to the platform since lender demand often outpaces supply and not everyone can at their computer at the time of loan release.
One of the previous issues with Collateral was that deep pocketed investors would scoop up large amounts of new loans. This resulted in more demand than supply and many unhappy lenders. Collateral sprang into action and placed investment limits on certain loans giving all lenders a fair chance to acquire loan pieces.
The Secondary Market
An active secondary market means it’s easy to sell unwanted loan pieces but high demand makes secondary market buying difficult. All secondary market loans appear on the same screen as primary market loans so there is no differentiation between the two.
Interest Collected Upfront & Buy-Backs (Sort of)
Some of the loan items are underwritten by loan partners and are covered under a Buy Back Agreement otherwise known as a COLBB. This means that in the event of a default, these partners have agreed to buy the items back for a set price. This set price is the items loan amount plus the full terms interest. These buy backs are not guaranteed or legally binding so it is debatable how much weight they hold.
This fee is the entire loan terms interest. For example if a borrower takes out a £5,000 loan for six months, the buy back fee would be £300 equal to six months worth of interest.
This fee is to ensure that the Loan-To-Value ratio doesn’t increase during the life of the loan. Good thinking Collateral!
Buy Back Agreements are a nice perk but if the gold prices dropped, I doubt the loan partners would proceed with the buy backs.
Collateral’s p2p website is easy to use despite having some technical teething issues.
Here is the loan availability dashboard:
And here is the My Loans page:
Collateral’s website is simply laid out showing all the important information. Well done Collateral!
WHAT I DISLIKE ABOUT COLLATERAL:
Higher Risk / Small Peer To Peer Lending Track Record
Collateral is a newer platform so this increases lenders risk. I took a leap of faith and invested partly because I believe the Director and staff are quite experienced in the pawnbroking field. It does worry me a little that they are branching into property loans as I’m not sure how experienced Collateral is in this sector.
I recommend evaluating your own risk tolerance to see if the risks are worth the returns.
Untested Default Handling
Along with the lack of history comes the lack of defaults. I have yet to experience a default so I can’t comment Collateral’s p2p recovery process and success. Only time will tell.
Limited Valuation Information / Documents
Valuations are provided by independent parties so it would be nice to read the valuations. Currently Collateral provides very little valuation information on each item.
Since I stared investing in Collateral soon after their launch, I reached my desired investment amount rather quickly. Demand was lower and new loans were being offered daily. Since then demand has increased and supply has decreased so reinvesting funds has been difficult. I continue to be patient hoping the loan flow will increase after the new year. I only invest in jewellery and car loans as I see no need to invest in riskier items such as property or art as they could be difficult to liquidate.
I wish to see how Collateral handle loans once they have cycled through their terms. How they handle defaults or loan issues will be key to long term success and investor confidence. If Collateral’s default handling runs smoothly as I hope, they will be receiving a larger investment from me in the future.
The Collateral P2P Review Conclusion
Despite the loan supply decreasing, Collateral has been a good experience so far even though I have only been investing for a relatively short period of time. Lenders are paid 1% monthly returns and payments are have always been on time. If you can be patient, I would recommend giving Collateral a try.
Are The Risks Worth The Returns?
This is not aimed towards Collateral as a platform but more as pawn lending as a whole. While borrowers are paying upwards of 18% annual interest on loans, one has to wonder if lenders returns are equal to the risk involved. If I had to guess I’d say lenders should ideally receive 1.5% monthly returns for pawn loan investing but as it stands, 1% is the average rate. Couple in a new platform with little history, then the risks exponentially increase. Just food for thought.
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** This unbiased Collateral p2p review is for information purposes only and should not be considered investment advice. Opinions expressed in this Collateral p2p review are based upon my investing experiences. All information was deemed to be correct at the time of writing. Peer to peer lending contains risks so never invest more than you can afford to lose. **