Linked Finance – P2P lending in Ireland

Peer-to-Peer lending has grown in popularity over the last few years. P2P lending is when a individual lends to companies or other individuals directly. There is a market place where the borrowers and lenders are matched together. P2P lending allows the lender to receive higher interest rates then they would get in a savings account. The best interest rate available in Ireland today for a lump sum savings account is less than 1% while with P2P lending interest rates of over 10% is not unheard of. With P2P lending there is more risk involved then a normal deposit account but there are ways to minimise the risk. Some platforms including Twino and Mintos offer buy back loans guarantee. In the case the loan goes into default, they will repay the balance to you. Also, splitting your investment across many different loans reduces the impact of a default. I’ve been averaging around 8% return on my P2P lending to date which is substantially more than I’d be getting if it was sitting in a savings account.

In Ireland there are two leading companies that I know of – Linked Finance and Grid Finance. There are also companies based outside of Ireland that accept lenders from Ireland including MintosTwino and Viventor. I only have experience with Linked Finance and Mintos. In this post I will cover Linked Finance and I will cover Mintos shortly. Linked Finance launched in 2013 with the goal of making it easier for small business in Ireland access funding.  When Linked Finance first started it was a true marketplace. A business would ask to be allowed to request a loan on the market place for a certain amount. Before the loan request would go on the marketplace, a background check of the business and directors was completed and if everything was above board, the loan request would go live for a defined period, normally around 10 days. Once live on the marketplace, lenders would place bids on the loan for example saying they would lend €500 at 11.5%. After the 10 days, if combined the lenders were will willing to lend the total amount, the loan was successful. Otherwise, if they didn’t get enough offers, the loan was rejected. If the loan was oversubscribed, i.e. combined the lenders were willing to lend more than request, the offers with lower interest rates were successful. This model allowed the market to define the rate for the loan. It worked very well in my opinion and I was very happy using it.

In August Linked Finance changed their set up to go from a bidding situation to a fixed rate system. Now, when a company applies for a loan through Linked Finance, they will do their background checks and apply a interest rate to the loan. Then lenders can choose to lend at this interest rate or not. They have published their current rates table which I have pasted below.

Current Rates
Grade 12 mth 24 mth 36 mth
A 8.5% 9.1% 9.6%
B 9.2% 9.7% 10.2%
C 10.0% 10.7% 11.2%
D 12.0% 12.7% 13.2%
E 15.0% 15.0% 15.0%
Y 15.0% 15.0% 15.0%

 

There seems to be no transparency as to how each loan is graded. I know on boards.ie there is a lot of people who are not happy with the new system at all. While at first I really didn’t like it. I don’t mind is as much any more but have found my level of lending on Linked Finance has gone down since the change. Instead I use Mintos as my primary P2P lending now and haven’t made a deposit to Linked Finance since August.

I have 19 loans with Linked Finance each in varying amounts between €50 and €1000. They cover a whole range of industries including beers, chippers, golf courses, cheese, gyms and construction. While I’ve yet to have a missed payment or default on my Linked Finance account, some on boards.ie haven’t been as lucky.

Signing Up

Signing up is simple. There is one short form to fill out and you’re ready to make a deposit.

Depositing

Deposits can be made by bank transfer, debit card, standing order or credit card. Credit cards incur a 2% fee. Bank transfers take up to 2 days to be processed while debit and credit cards are instant. The minimum amount for a deposit is €50

Lending

Once you have signed up and made a deposit you’re all set to lend. When logged in go view the Live Loans section. Here you will see the business name, the amount their looking for, the term of the loan (either 1,2, or 3 years) and the interest rate applicable. You can also see the current bids on the loan, the business profile, financial summary and a Q&A section where lenders can ask the borrower questions. If you’re happy to lend, click Place Your Bid and choose how much to lend. The minimum is €50. That’s it! If the loan is fully funded and the business accepts the loan the agreement will be in force and you should receive your first repayment in about a month. If the loan is not fully funded or the business decides not to complete the loan, the funds will be refunded into your Linked Finance lenders account.

AutoBid

As well as the manual lending described above you can set up an AutoBid. Linked Finance are really pushing this feature but I’m strongly against it. Using their AutoBid feature means putting a lot of trust into their grading system – something I don’t have a lot of trust in. I’ve never used the AutoBid feature on Linked Finance but it seems pretty simple. From within your Linked Finance My Account Page select edit Auto Bid.

Autobid

Clicking edit beside each of the grades allows you to enter in an amount for 12 months, 24 months and 36 months. For example, if you enter €50 for 12 months under Grade A, every time there is a new 12 month loan thats Grade A you will automatically invest €50 in it provided you have the funds in your Linked Finance lenders account. You don’t need to do anything. Some people will love this feature, it takes away a lot of the work required to lends and makes sure you don’t miss out on any loans but at the same time it takes away a lot of the control.

Repaying

Once you have successfully lent money you will receive a monthly payment from the borrower. This will consist of principal + interest – lenders fee. The money will be sent to your Linked Finance lenders account where you can then reinvest it or withdraw it.

The below is taking from Linked Finance FAQ page:

“When you bid on a loan you are bidding at an annualised percentage rate. This is the standard industry way that interest rates are displayed.

Repayments and interest are calculated using amortisation. In simple terms, this means that interest is charged each month and only on the principal outstanding.

Here’s an example.

  • You lend €100 at 8.5% on a 12-month fixed rate loan.
  • If the loan was repaid in one lump sum at the end of the term, the interest charged would be 8.5% or €8.50.
  • Because, however, the loan is being paid back on a monthly basis and the interest is charged on a reducing balance, the total interest charged over the 12 months would be approximately €4.66 and not €8.50.
  • You also need to consider the Linked Finance lender fee of 1.2% which is also calculated on the reducing balance. In this instance, the fee charged would be about €0.66.

The key to maximising your return is to redeploy your funds into new loans as soon as they are paid back into your Linked Finance account. This will ensure that your money is working as hard as possible as well as diversifying your portfolio and minimising risk.”

Fees

Linked Finance charge lenders 1.2% annual service fee of the value of all loans at the end of each month. This fee is deducted from the repayments you receive.

Withdrawing

You can make up to four withdrawals free of charge per 12 months. Only funds that are in your lender account and not lent out can be withdrawn. Each withdrawal in excess of these four costs €10. Withdrawals are processed by bank transfer. It seems to be a bit hit and miss as to how long it will take to complete. Most of mine were completed in 3-4 days. If it is your first withdrawal they will be required to verify your account before completing the withdrawal. This involves sending them one proof of identity and one proof of address via email.

  1. Proof of Identity: Copy of Passport/Drivers Licence/EU Card.
  2. Proof of Address: Financial statement which must be dated within the last 6 months.

Tax Issues

Linked Finance does not deduct any tax from the repayments. For the vast majority of lenders, interest earned from lending will be qualified as non earned income and must be declared on self-assessment each year to the Revenue.

 

While I will probably continue to use Linked Finance I will just be reinvesting repaid loans and not depositing any more money for the time being anyway. Instead I’ll be using Mintos a lot more and possible will try Twino as well. I can see P2P lending continue to grow in the coming years. I’m earning 8%+ interest compared to a measly .6% with my Rabo Savings account. Yes there is more risk, but its definitely possible to minimise risk and for me, the risk is worth it.

 

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