Funding Circle Review
** Funding Circle review updated August 7th, 2018 **
Big changes were implemented to Funding Circle’s lending model on September 18th, 2017. So do I still recommend dipping your toes in the Funding Circle peer to peer lending waters? Yes but read on for some of my gripes! Some lenders will dislike the changes but I will present a different opinion as to why I think the changes are positive. Read on for my updated Funding Circle review.
My July 2018 Allocation: Unchanged
My annual rate of return: 7.5%
|Est. Annual Returns:||Up to 7% (after fees)
|Recent Return Rate Trend:||← →|
|My Risk Rating *:|
|Loan Types:||Business, property development|
|Loan Security:||Business loans are unsecured. Development loans secured by property and land|
|Lender Fees:||1% annual fee|
|Min Investment:||£20 per loan / £100 initial deposit|
|Avg. Lender Portfolio Size:||£8,000|
|Time to Become Invested:||Varies based on demand / supply|
|Time Needed Managing:||Zero|
|Lending Agreements With:||Borrowers|
|Sign Up:||Sign Up
* This opinion risk rating factors in types of loans offered, interest rates, platform history, default numbers and my own investing experience. My risk rating explained.
Funding Circle Review: What You Need To Know
- Founded in 2010 / good track record, growth and trading history
- Autobid for those wanting hand-off investing
- New rules present a fairer system with zero time management
- Transparent statistics
- Secured property loans
- Funded £2.7bn+ in loans
- Received £80m in support from the government owned British Business Bank
- Fee-free secondary market for lenders to sell loans
- Company has modern slavery statement
- Most loans are unsecured
- Interest return rates not the best considering most loans are unsecured
- 1% annual fee
- Some of my funds have been stuck in unlent purgatory for several weeks
- Idle funds can lead to cash drag (returns lost to uninvested money)
- New auto-invest only produucts will displease manual investors looking for higher returns
Funding Circle Review (UK): My experiences so far….
When I initially began investing through Funding Circle in 2015, I was a little concerned about lending businesses using unsecured loans but I considered the interest rates worth the risk. But as time passed, the interest rates drastically dropped due to a change from a bidding system to a fixed rate system. I was finding manual investing far too time-consuming for the rates offered and I ultimately decided to exit the platform. In June 2017, curiosity once again got the better of me and I decided to give Funding Circle another try but this time, using the lower interest paying auto-bid feature. I wanted to see what types of returns I can achieve using a hands-off strategy.
What Is A Funding Circle?
Funding Circle peer to peer lending loans are given to small British businesses and property developers. Lenders buy loan parts and receive monthly payments. Loans are rated by risk grades from A+ to E, and the interest rates are based on the grades. A+ loans pay the least interest while E loans pay the most. Most loans are unsecured (other than personal guarantees), except for certain property development loans, which are secured by real estate.
How Can I Contact Funding Circle?
UK Tel: 0800 048 8747
When Did Funding Circle Launch?
Are They Regulated?
Yes, by the UK Government’s Financial Conduct Authority #722513 under full authorisation granted May 25th, 2017.
How Do I Sign Up?
You can sign up here. Currently, Funding Circle isn’t offering any cashback offers but if possible, please write Financial Thing inside the “how did you hear about us field”.
Who Can Open An Account?
Any UK resident or non-resident who owns a UK bank account and can pass the i.d. checks.
What’s the Signup Process Like?
Pretty easy. Just pass the security checks and provide any requested documentation.
How Much Time Will It Take To Become Invested?
There’s no definite answer to this since Funding Circle is removing the ability for lenders’ to manually invest in individual loans in favour of purely focusing on its auto-bid feature. If I had to hazard a guess, I imagine many manual investors will exit the company because of the reduced return rates meaning many loans will become available. I don’t think it will take too long to become auto-invested but only time will tell.
When I used auto-bid in June 2017, I was able to become fully invested in two days.
How Much Time Will I Need To Spend Managing My Investments?
Since auto-bid is the only option, you will spend zero time managing your investment.
What’s The Minimum Deposit / Investment?
Loans: £20 minimum
Deposit: £100 minimum using a debit card. No minimum for bank transfer
How Are Deposits Made?
You can instant deposit via debit card or use a bank transfer which takes up to three business days.
Does Funding Circle Offer an Innovative Finance ISA?
Yes there is an IFISA
What Are The Different Lender Products?
Funding Circle offers two auto-bid products lending on businesses and property development loans. The two products are Balanced with an annual targeted return of 6-7% and Conservative with an annual targeted return of 5-5.5% after bad debts and fees. See below for more information.
Is Auto-Investing Available?
Yes. Funding Circle offers two auto-bid options:
Balanced: Your money is deployed across all loan risk levels A+ through E which result in higher return rates but with higher defaults.
Conservative: Your money is deployed across what Funding Circle considers higher quality A+ and A loans. That should, in theory, result in very low default rate and a stable projected returns.
There are no other settings on the auto-bid presenting an extremely simplified process. Just choose which product you want and off you go:
How Are My Autobid Loans Allocated?
Autobid will automatically diversify your funds across available loans. A maximum of 0.5% of your portfolio will go into a single loan resulting in a more stable return. New loan parts will be no larger than £100 each. For example, if an investor had a portfolio of £100,000, no more than £500 would be deployed into a single loan and that £500 would be spilt into £100 pieces.
How Much Interest Does Funding Circle Pay Lenders?
Target rates are 6-7% p.a. for the Balanced product and 5-5.5% p.a. for the Conservative product. This estimated return is after bad debts and fees but before tax.
Is Interest Paid Immediately Or When Loans Begin?
Interest will be accrued once your money is deployed.
When Is Interest Paid?
Interest payments are staggered throughout the month.
What Are The Fees?
Service Fee: 1% fee taken when the borrower makes a loan payment
How Long Are The Loans?
Most loans are 5 to 60 months but some loans may redeem earlier.
Is There A Secondary Market To Buy, Sell And Exit Loans?
With the new changes, the secondary market will change. You decide how much of your portfolio you want to sell and Funding Circle will do the rest. Exiting will be free of charge which is a great benefit to lenders. It will be interesting to see how this works. There’s a possibility the secondary market will become extremely liquid and your account could be used as instant access or short term if normal market conditions exist. Premiums and discounts on secondary market loan parts are now removed. I was never a fan of secondary market premiums so I’m glad for the removal.
What Types Of Securities Do Funding Circle Loan Against?
Most Funding Circle peer to peer lending loans are unsecured (other than personal guarantees) except for certain property development loans which are secured by property and or land.
What Are The Reported Loan Bad Debt Rates (By Loan Origination Date)
Am I Lending To Funding Circle Or Directly To Borrowers?
All loan contracts are between lenders and borrowers.
What Happens if Funding Circle Ceases Trading?
Firstly, let’s hope this never happens. But if it does, Funding Circle has its policy stated here. To summarize, your lending directly to businesses, not to Funding Circle, which is a good thing. If Funding Circle goes out of business, a third party administrator would be assigned to collect and disburse your loan payments. In reality, no one knows how this would play out and this is all part of the risk of peer to peer lending.
WHAT I LIKE ABOUT FUNDING CIRCLE:
Track Record & Growth
The riskiest part of peer to peer lending is the unknown aftermath due to company failure. Some financial “experts” have deemed peer to peer lending riskier than loaning cash to your Uncle Ricky for his latest Internet start-up venture. But I view peer to peer lending in a positive light, as long as you diversify and spread your money across multiple companies and loans. Funding Circle is one of the older dogs in the peer to peer lending kennel and has loaned over £4.5bn since 2010; quite an achievement. Funding Circle has also set up shop in the USA, The Netherlands, and Germany. This means the company has the financial backing to grow and become profitable.
Deposits, Payments & Withdrawals
Deposits are made via Debit card transfer and show instantly. Withdrawal payments take 2-3 business days. Since you’re smart and will be owning 100+ loan parts, you’ll receive interest and capital payments frequently. If a business is late making a payment, it will show on your summary screen:
Sometimes peer to peer companies make drastic changes, sometimes good, sometimes bad. Funding Circle announced they would be making some big changes in 2017 which I imagine have been considered for some time and haven’t been taken lightly.
I’ve pondered the new changes and I will probably be one of the few supporters. Here’s a rundown:
- No more manual investing in loans
- Two auto-bid products, Balanced and Conservative
- No more than 0.5% of your portfolio will be lent to one business (£20 per loan min)
- Loan parts will be no larger than £100 making them easy to resell
- No more secondary market fees for reselling loan parts
The changes mean all lenders are now equal and there are no more people manually snapping up the high-interest D and E loans in seconds and then using the secondary market to flip them for a profit. The changes mean fair returns for those who don’t take or have the time to research each business. Inability to correctly research businesses sometimes ended in lenders buying poorly performing loans that resulted in lower returns. The changes and usage of auto-bids mean instant diversification where lenders own small chunks of many loans. This is the same way companies like Landbay, Zopa etc. It means no more exit charges! (yay), possibly an instant access type account? And finally, the new system will mean new opportunities for the upcoming ISA, where high tax paying investors may be able to realise double-digit interest returns.
Manual investors and people who use automated systems to buy the highest interest rate D and E loans will be upset and will exit because their return rates will plummet. People like myself who don’t have access to higher rate loans because they sell in an instant will be happy that Funding Circle has presented a fairer system.
So yes, I’m happy about the changes.
When a peer to peer lending site struggles to increase its loan book, I see more red lights and flags than in Amsterdam. Funding Circle doesn’t have this problem. Between June 2017 and June 2018, the Funding Circle peer to peer lending loan book has grown from £1.4bn to over £2.3bn! This growth allows Funding Circle to make more money from fees. Yes, I know fees suck but this is how Funding Circle stays in business, and that’s a good thing for investors.
Low Bad Debt and Default Rates
Defaults are part of peer to peer lending but Funding Circle keeps its bad debts at reasonable levels. You can see all the statistics here.
As of June 2018, Funding Circle’s projected bad debt ranges between 1.4% and 3%. Sometimes projected bad debt predictions tend to be conservative.
Most Loans Amortize
This means you receive interest and principal payments monthly. Each principle payment you receive on a loan reduces the risk of default. The loans that are interest only are clearly marked (usually the property development loans).
The Secondary Market
With the new changes, the secondary market should now be more liquid. No more premiums and discounts and no more exit fees.
The Modern Slavery Statement
Funding Circle has a Modern Slavery Statement where it denounces slavery and human trafficking. Funny to see but a serious cause that I’m glad Funding Circle supports. Want to read the statement? Click here.
WHAT I DISLIKE ABOUT FUNDING CIRCLE:
Lower Interest Return Rates
Keeping in mind most loans are unsecured and that Funding Circle deducts 1% from each borrower repayment, return rates are on the low side. There are alternative companies to consider however none have the operating track record of Funding Circle. What you give up in returns, you receive back via a certain level of safety.
Some Of My Funds Have Been Stuck In Unlent Purgatory For Several Weeks
Recently I noticed an increasing amount of unlent funds in my account. I scoured through my transaction statements and realised none of my funds had been lent out since the third week in May 2018. I placed a call to a very friendly Funding Circle customer service bloke who explained that increased lending demand due to the ISA introduction could be to blame. He also explained that lending priority is based up the percentage of unlent funds, so being that my account had 8.5% of unlent funds, he thought the lack of lending activity was unusual.
The customer service bloke said he would send an email to the powers that be to see if there is a technical issue. I will report back if I hear more.
Most Loans Are Unsecured
Loans other than property development loans are unsecured which means if a company defaults, the chance of money recovery could be lower. This is why it’s so important to diversify across many loans. Funding Circle recommends you don’t invest more than 1% of your total balance into any single company and that you hold at least 100 loans.
Idle Funds Can Lead To Cash Drag (Returns Lost To Uninvested Money)
For the past three months, I have noticed my account has uninvested totaling 8%-10% of my account. Idle funds lead to a reduction in estimated returns. This happens when lender supply is greater than borrower demand. Since Funding Circle only offers autobid prodcits, there is no way to manually invest this idle money into loans.
Some peer to peer companies charge fees to borrowers rather than to lenders. Funding Circle charges fees and collects a 1% fee on all borrower repayments. This fee means that lenders receive 1% less in returns.
I stopped manual investing with Funding Circle in 2015 but recently reinvested when manual investing was abolished in favour of their auto-investing feature. Manual investing was simply too time-consuming which is why I exited in the first place. I still use the Balanced product despite the targeted rates being increased on the Conservative product. I think the Conservative product offers too low returns and I’m not certain the A+ and A rated loans are much less risky than some of the B to E loans. I set all interest and capital repayments to reinvest and am happy with Funding Circle’s product as it stands.
Funding Circle Review Conclusion
Having lent over £4.5bn, Funding Circle is a giant in the peer to peer funding world, plus it’s a well-funded company that has been growing year to year. Lender returns are still attractive even though manual investing has been eliminated and on the plus side, investment time management has been reduced to zero. Funding Circle’s ISA will help lenders to achieve higher tax-free returns.
Given Funding Circle’s trading history and the auto-invest product leading to a totally hands-off investing experience, I’m willing to take lower returns than I was used to. Funding Circle could be a part of your diversified peer to peer lending platform portfolio, alongside other companies such as Assetz Capital.
Thanks for reading my Funding Circle review.
You can sign up here. Currently, Funding Circle isn’t offering any cashback offers but please write Financial Thing inside the “how did you hear about us field”.
Disclaimers: I’m not paid to write this Funding Circle review nor am I employed by any of the companies I write about. In most cases, I have invested or continue to invest my own money through these companies. The sign-up links on this Funding Circle review and in this website are referral links. When you sign up for an account through my website, I receive a referral fee directly from the companies, at no cost to you. Your support enables me to continue to operate the Financial Thing website. You can read more about my referral links here.
** This Funding Circle review is for information purposes only and should not be regarded as investment advice. Opinions expressed in this Funding Circle review are current opinions based on my own personal experiences. Peer to peer lending contains risk and your capital is at risk. Never invest more than you can afford to lose. **