Is it wise for investors to sidestep the banks – MoneyWeek

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Thedifferenceisthatthisnewbondgivesinvestorsdirectaccessto“theattractivereturnsavailableviaP2Plendingwiththeconfidenceofknowingthattheloanshavebeenselectedbyanexperiencedfundmanager”,asthePRreleaseputsit。

That,saysThinCats,makesitdifferenttoamarketforloans,whereeithertheinvestorhastochoosewhichborrowertheywanttolendto(essentiallywhathappenswithFundingCircle),orwherethecashlentisautomaticallyallocatedtoborrowersiftargetlendingandborrowingratesmatchup。

Sohowdoesitwork?

Howitworks

ViaThinCats,aninvestorcanbuyasinglebond(makealoan)。

Themoneyinvested–£5,000istheminimumsubscription–willthenbeusedtomakeaminimumof14separateloanstosmallandmedium-sizedbusinesses(SMEs)。

Thatway,nomorethan7。

5%ofthetotalfundscommittedtothebondwillbeatriskwithanysinglefirm。

Thisissupposedtokeepthedefaultriskdown。

Betterstill,thetargetrateofreturn–interestreceivedbythelender–is8%(beforeincometax)。

AsKevinCaley,managingdirectorofThinCats,says:“ThebondisidealforthosewholiketheideaofP2Plendingbutwouldratherdelegatetheindividuallendingdecisionstoan…expert。

”What’snottolike?

Thepitfalls

Asalways,youdon’tgetsomethingfornothing。

Thetargetyieldof8%isprettyattractiveinthisclimate,soitstandstoreasonthatyou’retakingmoreriskthanyouwouldinabankaccount。

With14differenthomesforyourmoney,youareunlikelytolosethelot。

Butatthesametime,youarelendingtosmallerbusinesses。

Theseareparticularlyvulnerableduringthesortoftougheconomicclimatewe’reexperiencingnow。

Theirsizemeansthat,eventhoughyouaremakingaloan,ratherthanbuyingriskiershares,thisisunlikelytocountformuchshouldoneoftheborrowersdefault。

Whilebondsareusuallypitchedasbeingsomewherebetweencashandsharesintermsofrisk,thistypeofIOUmustbeseenasonaparwithmostshares,giventhenatureoftheunderlyinginvestments。

Allofwhichmeansthisisstillaprettyriskywaytoinvestcash,andthetrackrecordofthistypeofbondisobviouslylargelyunknown。

Remembertoothat8%isatarget,notaguarantee。

Thentherearethefees。

Thestart-upchargeis2。

5%plusVAT,tocover“theduediligenceinvolvedinmakingtheloans”。

There’safurthermanagementfeeof10%(againplusVAT)ofanyinterestearnedabove7%。

Althoughthisbondmaycutoutbanksasthemiddlemen,it’sstillnotcheapcomparedtoacloserivalsuchasFundingCircle(seebelow)。

Also,thisisnotahomeforyouremergencycapital,oranymoneyyou’llneedbackintheshortterm:ThinCatsanticipatestaking“atmost,justunderfouryears”torepayyourinterestandcapitalandbailingoutofanybondyoubuyearlywillbetricky。

Thereisnotradingplatformviabrokersinthesamewayasyougetwith,say,retailcorporatebondstradedattheLondonStockExchange。

Sowhatarethealternatives?

Directloanstocompanies

FundingCircleallowslenderstomakedirectloanstoborrowersandtakesouta1%annualservicingfee。

ThisisarguablyfarriskierthantheautomaticdiversificationyougetwithThinCatsandputsmoreofanonusonyoutodosufficienthomeworkontheborrower。

Ineffectyouareplayingtheroleoftheold-fashionedbankmanager,butwithoutthesametrainingorexperienceinmakingriskyloans。

Butwithnofundmanagerinvolved,atleastit’sacheaperdeal。

However,althoughyoucanspecifyaminimumyieldasalender–averageyieldsvaryfromaround7。

3%to9。

4%,accordingtoFundingcircle–inthemarket-placeauctionthatfollows,youmaywellnotgettolendattheminimumrateyouwantifotherinvestorsundercutyou。

LikeThinCats,anydefaultwilldestroyyourtargetreturn。

SoisthereawayyoucandoP2Plendingwithoutmakingloanstocompaniesatall?

LendingtheZopaway

Oneofthebest-knownP2PsitesisZopa。

ThedifferencewithZopaisthatyoucanlendmoneytoalmostanyoneforalmostanypurpose–frombuyingacaravantotakingchildrenonatriptopayingforadivorcelawyer。

Youcanlendfrom£10upwardsoverthreeorfiveyearsand,again,youselectatargetrateofreturndependingontheriskoftheborrower。

Ifthissoundsabithairyinthecurrentcredit-starvedclimate,itis–evenZopaacknowledgesthatdefaultrateshavecreptupinrecentyears。

Shouldyougetinvolved?

Beatinginflationandgettingoneuponthebanksaretwoworthygoals。

Butbecareful–directlendingtosmallcompaniesorindividualsisrisky(farriskierthanputtingyourmoneyinabankaccount)andinthecaseoftheThinCatsoffering,quiteexpensivetoo。

Ifyoufancyyourskillsasabankmanager,thenit’sfineforasmallpartofyourportfolio–butbeinnodoubtthatwhatyouaredoingishighrisk。

Widowsandorphansneednotapply。

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