Rising base rate poses challenge for P2P firms
Assetz Capital blamed the rising base rate and corresponding increases in bank savings rates for its recent decision to run down its retail loan book, as it made its product less competitive.
This raises the question of how high peer-to-peer investment returns need to be to attract investors in the current economic environment.
The UK base rate is currently at 3.5 per cent and Bank of England is expected to continue increases over the next year in a bid to tame spiralling inflation.
Read more: Folk2Folk raises rates as it seeks to attract Assetz Capital investors
This means that P2P platforms offering returns of around four per cent – like Assetz – are set for a tough time persuading retail investors to take on risk when they can earn a similar amount of interest in a cash savings account.
“One problem P2P lenders have is persuading people to take the risk of P2P lending, when they can get 4.7 per cent on cash savings over two years without the risk,” commented Sarah Coles, senior personal finance analyst at Hargreaves Lansdown.
Read more: Why are P2P platforms raising their rates?
“Not only are the returns better on cash than they have been for years, but the risks posed by the forthcoming recession are at the forefront of their minds. Given that default rates on unsecured lending are growing, there are bound to be concerns about issues with the repayment of loans.”
The Bank of England’s latest quarterly credit conditions survey, published on 19 January, showed an increase in default rates for unsecured lending in the three months to the end of December. Defaults are also expected to increase in the first quarter of this year.
Some P2P lending platforms have raised rates in an effort to make their offering more attractive to investors.
By September 2022, Loanpad had announced six rate rises over six months, with premium accounts offering 4.8 per cent in returns. Meanwhile, EasyMoney scrapped its bottom rate investment product and moved account holders to its premium account offering 4.03 per cent in October.
Read more: P2P platforms reaffirm commitment to retail investors
However, some platforms are offering much higher returns. Crowd2Fund raised its target interest rates to up to 16 per cent back in August, while CrowdProperty targets returns ranging between seven and eight per cent.
Lendwise offers target returns of nine per cent for backing student loans, while short-term lender Fund Ourselves targets returns of up to 15 per cent.
However, investors should make sure to decide on their risk appetite before choosing their P2P products.
“Typically those P2P companies offering higher potential returns will take on more risk in order to provide it,” said Hargreaves Lansdown’s Coles.