New minimum interest rates at Funding Circle

A cap has been placed on the minimum interest rates available at peer-to-peer website Funding Circle. What does this mean for lenders?

Funding Circle has changed the minimum amount of interest investors can charge when lending money through the website.

Instead of the previous minimum flat-rate of 4%, there are now tiered amounts depending on the risk level of a borrower.

The new rates are higher and therefore give investors a better opportunity to get a better return on their cash.

But some users have expressed concern as they think fixing rates at this new level will unbalance the supply and demand on the site – making it harder for investors to secure new loans.

New minimum rates

Funding Circle is a peer-to-peer lender which organises loans between businesses and individuals. Each business is given a rating, highlighting how risky it is perceived to be.

The tiered rates were initially introduced as a four-week trial, but this has now been shortened to a week. They have been brought in to help "sustainability in the marketplace in the long term", according to Funding Circle.

The changes affect businesses classed A+ to C.

Supply and demand rates

Several Funding Circle customers have expressed anger over these changes. They believe it is price-fixing and will change the supply and demand balance on the website, which will in turn have a negative effect on lenders.

As the loan rates are more attractive, a higher number of people will be bidding against each other. This could mean there will be less chance of getting one of the best rates.

One of the main complaints is also the lack of explanation from the company as to why these changes are being implemented.

David de Koning, spokesperson for the company, told us he understands why lenders think the decision could be problematic. But he says investors do not need to worry as research from last year shows that when overall interest rates were higher than the new tiered rates, there were no issues.

He also points out that investors can access their money through the website’s secondary market if they need it faster.

They can also use the Autobid tool which buys loans set at a rate equal or higher than the rate the investor has set. With Autobid, when a loan is bought the rate will then be raised to meet the minimum bid on new auctions. Historically, this market has remained active despite higher rates on new loan requests and De Koning says it should be able to cope with the recent changes.

Interest rates

Lending money through peer-to-peer websites has become increasingly popular in the past year as the returns on offer are far above those handed out by the high street banks and building societies.  

The average rate of return from Funding Circle is 5.8% which is far beyond the average 2% on offer from mainstream savings accounts. Since the Government’s Funding for Lending Scheme (FLS) was introduced last year savers have been flocking to these sites in search of interest and applications for Funding Circle were up 25% in the past quarter.

But there is a catch as these sites aren’t yet regulated. That means that there is no protection offered by the Financial Services Compensation Scheme (FSCS). However, each peer-to-peer site has safeguards in place to protect lenders' cash.

What do you think? Will the new minimum interest rates help or hinder investors on Funding Circle? 

More on loans:

The cheapest personal loans

Relendex: new peer-to-peer property investment

Three ways to get an interest-free loan

Bridging loans: pros and cons

Cheapest loan of 4.9% launched by Zopa

Payday lender rapped for advertising £1,000 loans for 'a night out'