In 2013, I looked at my shares in Tesco (the UK’s largest retailer) and thought: ‘This is crap. Tesco is kind of crap. I don’t even like shopping there, so I’m gonna sell my shares. Also, Tesco has a mountain of debt (debt to capital ratio of 50.76%), so I want out’. So, I sold my shares. Turns out, this was a very prescient decision, since Tesco has undergone major woes over the last few months. And when I say major woes, I mean their share price is probably going to end up at less than a third of what I originally paid for the shares… their lowest low of the last 15 years. This is due to some kind of an accounting scandal, in addition to the ongoing pressures in the UK grocery retail market – in that the discounters Aldi and Lidl are starting to eat up market share. Strangely, the upper end of the market, mostly accounted for by Waitrose (part of the John Lewis Group) has also stolen market share from Tesco. How the mighty are fallen! They once took 1/6 of all retail money spent in the UK. So, I guess I can say I’m pretty thankful that I took the decision to sell.
I really find it hard to sell shares sometimes. Tesco were not doing that badly when I made the decision, but I just kind of felt bad about them. I much prefer Sainsbury’s to Tesco, even though they too have had their price dragged down, largely due to the enormousness of Tesco’s problems dragging down the entire grocery retail sector. But then I had to think about what to do with the money I’d got back from selling the Tesco shares. I could have bought something boring like Royal Dutch Shell, but in the back of my mind I had other ideas circulating.
I already knew p2p lending is worth doing…
I knew about p2p lending (peer-to-peer), as I had dabbled with ZoPA before going back to education as a mature student. I used it to boost my (somewhat miniscule) savings a bit so that I would have a rent deposit and money to buy stuff I needed for art school. I didn’t want to do ZoPA again, purely because by the time I was selling my Tesco shares, I was really interested in entrepreneurship, startups, and small businesses. So I looked into Funding Circle instead, and soon decided to put the Tesco money into funding small businesses.
What helped me make that decision, were two things. Firstly, the way that you can spread your risk into lending companies batches of £20 – so you can, if you want, minimise your risk quite well in this way. The interest rates after fees and bad debt estimates were also pretty good – 5% upwards for ‘safer’ loans. I decided to play it pretty safe and stick to A+ rated businesses in my latest attempt at investing through p2p lending. I am happy to say, that I have earned an APR of interest at 6.4%. It could have been a bit higher, had I included lower rated businesses, but I am pretty happy with this level of interest. The second decider for me was seeing regular money coming into my lending account. This is not a necessity, but it helps me, psychologically, to see that my money is growing on a regular basis, even if it is only by very small amounts. This goes a little way to smoothing out wonky cashflow, which is kind of a bummer when looking at my income from dividend shares.
Conclusion: Is p2p lending worth doing? For me, YES!
Anyway, this whole p2p lending malarkey has been quite successful so far. My question is therefore: ‘Do I put more into p2p lending to small businesses? If so, how much? Do I do this p2p lending stuff regularly, alongside my share portfolio, or just whenever I like?’ So, it’s over to YOU. What would YOU do? Is P2P lending worth doing in your opinion?
Let me know your thoughts, leave a comment below 
I started p2p lending last summer and so far, have been happy with it. Most of my money is now split between Ratesetter and Funding Circle, although I’m shifting more towards the latter as the interest rates are higher. I invest down to B rated businesses but mostly to A or A+ so my average interest is over 10%. The small amounts loaned out make me comfortable using my money this way and I look forward to them being under an ISA wrapper as suggested by the government.
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Great to see you’re having success with it. I am liking Funding Circle quite a lot right now. I also got £20 free from ADVFN as a credit to rebuildingsociety – yet another p2p site (which I’d not heard of), but it’s pretty new. They actually sent me a slice of homemade Christmas cake right before Christmas. Yes, I was very impressed to say the least. Reminded me of ZoPA from back in the day when I first started – they sent me a really nice, tall hot chocolate mug.
P2P lending isn’t allowed here in Michigan along with a few other states so I’ve not tried it yet although I probably would given the chance. I’m not sure why it’s not allowed – it’s either due to fraud prevention since the debt is in the borrower’s name or required background checks that the borrower can repay the loan, neither of which are performed / guaranteed by Lending Club or Prosper.
I don’t know enough about how it works to add a more meaningful comment but it’s definitely great to see newer financial systems such as crowd-sourcing and P2P gaining acceptance.
Best wishes,
-DL
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DL,
thanks for stopping by. I’m not surprised that it is not allowed in Michigan, given that Lending Club and Prosper supposedly don’t do checks. Here, our p2p lending companies are regulated by the FCA (Financial Conduct Authority), and borrowers are credit checked, whether they are business or personal loan requests. However, there is no guarantee you will ever get your money back, unlike a regular savings account which is guaranteed to protect you up to £85,000 (or if a Euro account, €100,000).
Our government are even going through a consultation with the lenders right now, to see if these types of investments can be included in an ISA Wrapper – our tax-free investment vehicle. This would be fantastic, as the gains would be tax-free, and one is allowed to deposit £15,000 per year, so if it all worked out well, you could make some serious profits.
I think the USA should do some kind of regulation on this area, I know it’s sometimes contrary to the American way, but people are often foolish (ignorant) and I just can’t bear to hear the sob stories of people who threw away their money because there was no protection in place for them. As long as they understand the risks to their money, then that is fine, but I often feel that they don’t… the recent sob stories Kapitalust wrote about with the people losing all their money (and more) on GT Advanced Technologies are a case in point.
Thanks for stopping by, as always!
Cheers, and Merry Christmas
I’ve heard a lot about p2p lending. My main question is whether these profits can be sustained. I mean if p2p lending was so good for lenders, wouldn’t a lot of NEA lenders drive returns down? What’s the true risk here?
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I think they can. The p2p market for lending is mostly for personal loans or loans to small businesses, not mortgages. A company such as ZoPA for example, I would think has lowered to cost of loans to many, due to the way they match people together. The lenders are still getting far higher returns on their money than leaving it in a bank account, or receiving average % dividends.
M,
first of all, I am very happy about you posting so much in the last couple of weeks! Thanks for sharing!
I have not engaged in P2P lending, yet. To me it seems somehow in-transparent and risky. Do you get to choose to whom you lend money to? Do they provide any securities or collateral?
A lot of FI-bloggers are using it and you guys seem to are making good money out of it so far. I just wonder what happens if it goes wrong. But maybe I am just not educated enough on the topic.
Good luck with your lending endeavours!
Stef, thanks for stopping by, and thanks so much for your kind words!
There is a lot of choice with p2p lending in the UK at least. We have ZoPA, which has been going for many years. They say: ‘Everyone who applies for a loan is identity-checked, credit-checked and risk-assessed by our expert team.’ They also have something called the ‘safeguard fund’ now, which was not around when I started lending with ZoPA 8 years ago. It has been very successful in protecting people: ‘The Safeguard fund has covered all bad loans since it launched. This means not a single lender has lost money on loans covered by the fund.’ I have not used ZoPA in a while, but always loved their site, their service, everything about them was good.
I just wanted to start lending to small businesses instead, so I went to Funding Circle: ‘Our experienced credit assessment team review every application and only allow established and creditworthy businesses to borrow through Funding Circle. However, it’s important to remember that some businesses will not be able to fully repay their loan. We call this a bad debt.’ However, if you diversify enough you will guarantee a return: *Lend to at least 100 businesses; *Lend no more than 1% of your total to each one; Every investor who has followed these 2 simple steps has earned a positive return (18 August 2014).’ I am very happy with Funding Circle and I am really enjoying the opportunity to lend to small businesses – something which I really believe in.
There was recently the IPO of Lending Club in the USA, now I think that will make so many more people aware of these sorts of investments, but many people may just jump right in an get burned. As you rightly say ‘what happens if it goes wrong’, well, I could say the same about many stockmarket investments, such as ARCP or Tesco or Enron etc. What if they go wrong? You have the potential to lose money in all sorts of investments. That is why you have to manage your risk and your diversification strategy carefully I guess.
Vielen Dank!