What level of returns do you expect to get when you lend through a peer-to-peer platform?
At the moment, visitors to the Zopa website are are in line for a projected return of 5.1% for loans over five years or 4% over three years.
But a new index launched this week gives customers, for the first time, the opportunity to see the actual returns that fellow lenders have made in the past.
The Liberum AltFi Returns Index (LARI), run by analyst AltFi Data, has been set up to track the historic returns that have been available from the major players in the UK’s P2P lending sector.
The index has been created to provide greater visibility and transparency for P2P: although Zopa has been around for a few weeks shy of 10 years, this type of lending is still relatively new.
While much of the public is aware of P2P thanks to the rapid growth of the last few years, it is still outside the mainstream. What LARI hopes to achieve is to provide consumers with a much clearer picture of what P2P has to offer.
And while past performance is not necessarily a guide to what will happen in the future, LARI’s initial findings are certainly encouraging. The most up-to-date figures show that the typical return over the past 12 months is 5.09%: according to AltFi, this is what a “fully diversified investor in the sector should have made in the last 12 months from a time-weighted marketplace lending portfolio”.
But the index also shows just how reliable average returns have been since the P2P sector was established.
AltFi’s Rupert Taylor says: “The consistency of these returns is just as important as the absolute level. The index demonstrates that returns have consistently ranged between 4.5% and 6.2% since 2006.”
As Taylor points out, this is an impressive figure even when the risks associated with P2P lending are taken into account. The Bank of England base rate has been anchored at 0.5%, an all-time low, for six of those nine years.
Taylor adds: “The index also shows how impressively Zopa coped with the financial market dislocations of 2008-9, and how the industry has sustained that performance to the present day.”
To compile the index, AltFi has been given access to data on the cashflows from every loan made by Zopa, RateSetter and Funding Circle.
The platforms are also publishing details of their loan books on the AltFi website to give customers greater transparency of who money is being lent to as well as default and recovery rates.
Giles Andrews, Zopa’s CEO and co-founder, says: “AltFi Data’s P2P Index highlights how consistent returns at Zopa have been over the last 10 years, even during the worst financial crisis of the last 70 years, outperforming pretty well any other asset class in the period.
“We expect the index to become a useful and impartial tool in measuring returns moving forward and helping increase transparency in the P2P lending industry. Opening up our loan book to review and analyse is a positive move to provide greater transparency and one that is very much welcomed within the industry.”