How investor returns change over time

To help guide you on what you can expect from your lending experience, we wanted to show how a typical investor account could perform over a five-year period.

Performance over time

At Funding Circle, we show projected returns for both of the lending options available to investors. These are the annual returns investors could expect to earn once loans have been repaid. 

However, we don’t expect you to arrive at your projected return right away. During the course of your lending, your return will change. It will be affected by bad debt (businesses being unable to repay loans) and the recoveries you may receive (funds recovered from defaulted loans). Recoveries can take years, and the effect of bad debt is usually concentrated in certain phases. 

The below chart shows the typical stages a return will go through over a 5 year period. In this example, an investor has lent across all new loans taken out between 2012-2014, without reinvesting repayments. 

Phase 1 – Returns are at their highest initially

For the first few months the return is at its highest. This is because very few borrowers have been unable to repay their loans in the first 6 months.

Phase 2 – Bad debt causes a dip

We robustly assess every business you lend to, however, there will always be a small proportion who are unable to repay their loans in full. This is called bad debt. It can occur anytime, but it has the biggest effect between 6-18 months after lending starts. As you can see on the graph, it usually causes returns to dip during this period.

Phase 3 – Returns improve as recoveries and interest take effect

Although Phase 2 can be alarming, as you can see on the graph, typically returns pick up again. Although you will likely still experience bad debt, you’ll start to receive recoveries on some of the unrepaid funds and compound interest helps to boost your return over time. 

Think long term to get the best return

It’s important to accept bad debt as a normal part of lending. In most cases it will cause a dip in your return, and potentially some bumps along the way. However, by thinking long term, you can still earn attractive, inflation-beating returns.

The above chart is based on loan performance data over 5 years for all loans taken out between 2012-2014. As you are lending to your own portfolio of loans your return may differ. Past performance is not a guide to future performance and capital is at risk. Not covered by the Financial Services Compensation Scheme.