Peer to Peer Lending review – Squirrel

Squirrel (also known as Squirrel Money) is an Auckland based Peer to Peer (P2P) Lending platform which launched in late 2016. Squirrel was the second P2P Lending platform I joined back in March 2017, and is still going strong as one of the largest investments in my portfolio.

Today Squirrel has a community of 854 investors, investing an average of $17,600 each, funding an active loan book of $15 million. Following on from my reviews of Harmoney and Lending Crowd, this article will be looking at the Squirrel platform and its returns, risks, fees, and features. Could Squirrel be New Zealand’s best Peer to Peer Lending platform?

This is the third article in my Peer to Peer Lending review series:
Article 1Harmoney review (permanently closed to P2P Lending)
Article 2Lending Crowd review
Article 3 – Squirrel review (this article)

This article covers:
1. Getting Started
2. Potential Returns
3. Risk
4. Platform Fees
5. Platform Features
6. Other Talking Points

Update (19 Feb 2020) – Squirrel will update their P2P platform from March 2020 to introduce the ability to invest in home loans and business property loans. See this video for details.
Update (27 Jun 2021) – Updated for 2021

1. Getting Started

Squirrel works quite differently to Lending Crowd. Some P2P Lending concepts you may already be familiar with might not apply here.

Investment Products

With Squirrel you can choose to lend your money in one of five products:

  • Home Loans – loans for up to 7 years, for owner-occupiers or investors of residential property
  • Business Property Loans – loans for up to 2 years, typically for investors or developers to buy land and construct residential property
  • 1 year Personal Loans – loans for homeowners to fund renovations or significant purchases for their home
  • 2-3 year Personal Loans – loans for debt consolidation, purchasing a vehicle, or personal purposes
  • 5-7 year Personal Loans – loans for debt consolidation, purchasing a vehicle, or even funding a house deposit through Squirrel’s “Launchpad” product

Further Reading:
Investing in Mortgages – Home Loan No.1: a case study (Squirrel)
Investing in mortgages – Business Property Loan No.1: a case study (Squirrel)

Minimum Investment

Squirrel’s minimum investment amount is $500 per loan. This is very high compared to Lending Crowd, who have a minimum of just $50 per loan!

Investing in loans

To invest in a loan you need to place an investment order of at least $500 for the product you want to invest in. You then wait for a borrower to have their loan application approved and matched to your investment order – it’s like Tinder for your money! When there is more investor supply than borrower demand for a particular product, you will have to wait in queue for other investors’ orders to be matched tp loans before your order is matched. You can see the dollar amount of orders ahead of you in the queue when placing an investment order.

Once your investment order is matched with a loan, the borrower draws down your money and you’ll start earning interest. That’s it – You don’t have to review any borrower details, and select risk grades with Squirrel, and I will cover why later on.

I find the process for investing in loans really easy. You simply place an order and forget about it, unlike Lending Crowd where you have to wait for loans to appear on the platform before placing an investment order.

My experience – What did I invest in?

I primarily invest in the 1 year and 5-7 year Personal Loan products, as there is more demand for loans in these terms. However, there have been times where I’ve preferred the Business Property Loans as there are fewer investors to compete with in this term.

I do not currently have any funds invested in the Home Loan product. It provides the lowest potential return, and the term of up to 7 years is quite long. The loan term could potentially be shorter than 7 years, but there is no indication of the term at the time you’re placing the order (you only see the term of the loan once you’re matched to it).


Borrowers and their repayments

Once a loan is drawn down, borrowers pay you back either fortnightly or monthly:

  • Business Property Loans and 1 year Personal Loans are paid back with interest only, with the principal being paid back to you at the end of the loan’s term.
  • All other loans are amortising loans, paid back with principal + interest.

It is also common for borrowers to make early repayments, so you get decent chunks of your principal paid back regularly which you can then reinvest or withdraw.

Below are the interest rates that Personal Loan borrowers pay. The rate for 1 year Personal Loans is fixed at 7.95%, and Home Loan and Business Home Loan borrowers pay a variable rate.

There is a very important difference between Squirrel and Harmoney/Lending Crowd – On Squirrel the interest that borrowers pay is not the amount of interest that investors earn. Instead a borrower’s interest payments get split into three parts, which I’ll cover in detail throughout this article:

Part 1 – Your return
Part 2 – Reserve Levy
Part 3 – Squirrel’s fee

2. Potential Returns

Your return

Part 1 of a borrower’s interest payment is your return.

Part 1 – Your return
Part 2 – Reserve Levy
Part 3 – Squirrel’s fee

Unlike Harmoney and Lending Crowd where your potential return depends on the risk grade of the borrower, with Squirrel the interest rate you earn depends on the product you invest in:

  • Home Loans – 4% p.a. variable
  • Business Property Loans – 5% p.a. variable
  • 1 year Personal Loan – 6% p.a. fixed
  • 2-3 year Personal Loan – 6.5% p.a. fixed
  • 5-7 year Personal Loan – 7.5% p.a. fixed

While the interest rate for the Personal Loan products remain fixed for the duration of the term, the rates for Home Loans and Business Personal Loans may change within the term. This will depend on market interest rates – if the main banks increase or decrease their interest rates, Squirrel will follow. However, since the launch of these loans in April 2020, the rates have not changed.

My experience – What returns did I get?

My Squirrel portfolio is currently earning an average interest rate of 7.31%. However, I invested a large chunk of money into Squirrel when the rates were as high as 9%, so I expect my average interest rate to slowly fall as I reinvest my money at lower rates.

My returns from Squirrel are noticeably lower than Harmoney and Lending Crowd, where I was able to achieve returns of close to 13% on both platforms.

3. Risk

The main risk of P2P Lending is that a borrower defaults – in other words, doesn’t pay your money back. The risk is higher in the Personal Loan products (with potentially higher returns), and lower in the Home Loan products (with the lowest potential return).

Reserve Fund/Loan Shield

Harmoney and Lending Crowd platforms use Risk Grades and Fractionalisation to help manage the risk of defaults:

  • Risk Grades – allows you to choose the level of risk you want to invest in, compensating you with a higher interest rate for taking on riskier loans.
  • Fractionalisation – allows you to spread and diversify your money across many loans, so if one loan defaults, it doesn’t wipe out your whole investment.

Squirrel does not allow you to choose the Risk Grade you invest in, nor do they allow you to Fractionalise your investment into little $25 or $50 chunks. Instead you are protected by a Reserve Fund, also known as Loan Shield. The Reserve Fund is a pool of money which reimburses you in the case one of your borrowers defaults, or misses a loan repayment – a bit like an insurance payout.

The Personal Loan Reserve Fund holds $595,000 at the time of writing, which is 4.76% of the active loan book (currently around $12.5 million). This should provide more than enough protection from expected defaults, which is expected to be 0.98% of the active loan book.

Home Loans and Business Property Loans have their own reserve funds. This keeps the risk of investing in each type of loan separate from each other. Given the security of Home Loans and Business Property Loans over residential property, and the low Loan-to-Value Ratio (LVR) of these loans, defaults in these products are expected to be minimal. Therefore the Reserve Funds for these products are smaller and primarily cover late borrower repayments.

The implication of this is that you don’t need Risk Grades or Fractionalisation, because if you’re unlucky enough to end up investing in a bad loan, you have Loan Shield as a form of insurance. You could invest a $10,000 lump sum in one loan, without taking on more risk than investing $10,000 across 20 loans. However, this system does take control and visibility of loans away from the investor – which might be a good or bad thing depending on your preferences.

Where does the money for the Reserve Fund come from?

This is where Part 2 of a borrower’s interest payment comes in – the Reserve Levy:

Part 1 – Your return
Part 2 – Reserve Levy
Part 3 – Squirrel’s fee

The Reserve Levy makes up between 1% and 8.5% of a borrower’s interest payment, and goes directly into the Reserve Fund. Riskier borrowers pay higher levies, and this is reflected by the higher interest rates they pay (e.g. A grade borrowers pay 9.95%, and E grade borrowers pay 18.95% on a 5 year loan).

The Reserve Levy is why investors investing in riskier loans (for example, E grade loans) don’t earn a higher rate of interest. The extra interest that a risker borrower pays goes into the Reserve Fund, for the benefit of all investors on the platform, rather than for the benefit of an individual investor. It is like P2P Lending socialism.

The Personal Loan Reserve Fund appears to be conservatively managed, reserving more than the expected rate of defaults – the average Reserve Levy is currently 2.44% vs an estimated default rate of 1.13%. While this conservatism means less interest going towards an investor’s return, it does provide protection in the case that defaults are higher than expected.

What happens if the reserve fund is depleted?

While each Reserve Fund has enough money to cover any expected defaults, it is absolutely not a guarantee. If defaults are higher than expected, this could lead to the depletion of the fund. For Personal Loans this would take a big increase in the default rate from an expected 0.98% to around 5.5%

If the Reserve Fund was depleted, investors won’t get paid some or all of their interest. Instead investors’ returns would be diverted to the Reserve Fund in order to help refill it. This diversion would apply to all investors of a product on the platform. For example, if the Personal Loan Reserve Fund ran out, all Personal Loan investors would share the pain, rather than punishing the individual investors who invested in the bad loans. This situation would not be great, but at least your capital isn’t lost. Home Loan and Business Home Loan investors would not be affected in the case that the Personal Loan Reserve Fund ran out.

If investors’ returns is still not enough to replenish the Reserve Fund, then your capital would be at risk. This would require default rates to reach 12-13%. Given that during the Global Financial Crisis, a UK P2P lender’s worst default rate was around 5%, default rates of over 10% would probably require an unprecedented crisis to occur. In that case we’d probably have greater things to worry about than our Squirrel investments!

Security

Personal Loans over $20,000 are secured over a vehicle or house. Home Loans and Business Property Loans are secured over first mortgages over residential property. The loan size can be a maximum of 80% of the value of the property they are borrowing for.

Quality of borrowers

Another way Squirrel protects investors is their focus on lending to high quality borrowers. Over 90% of loans issued on the platform (by value) is for A, B, and C grade borrowers. In addition, the 1 year Personal Loan is for homeowners only, who want to borrow money for things like renovations, repairs, and big household items like furniture.

We’re certainly not the right lender for everyone. Our focus is on high quality creditworthy borrowers. On average we approve around 20% of the applications that we receive

Squirrel Investor Update, November 2019

My experience – Did the risk occur for me?

I feel that Squirrel is a lot safer than Harmoney and Lending Crowd – with these two platforms, if you pick a bad loan to invest in, your money is gone. With Squirrel, the Reserve Fund eliminates this risk (as long as it has sufficient funds). I have not experienced any capital losses so far (even with the impact of COVID-19), so it seems that the fund is doing its job!

4. Platform Fees

While Harmoney and Lending Crowd, deduct fees directly from the interest you earn, Squirrel doesn’t, for example, if you invest in a loan at a rate of 7.5%, no further fee is deducted from that 7.5% (apart from tax). This is where Part 3 of a borrower’s interest payment comes in:

Part 1 – Your return
Part 2 – Reserve Levy
Part 3 – Squirrel’s fee

The fee that Squirrel takes from a borrower’s interest payments (also known as the Service Margin) depends on the Risk Grade of the borrower. Below are the service margins for Personal Loan borrowers:

An unfortunate (but in my opinion minor) consequence of investors not seeing risk grades, is that the fee isn’t really transparent to investors either. And although the fee isn’t directly taken from investors, it is still an indirect fee – money going to Squirrel means less money going towards investors’ returns.

Fee Comparison

So are Squirrel’s fees reasonable or a rip-off? It is a bit hard to compare with Harmoney and Lending Crowd, given Squirrel’s different fee structure, but I will attempt a rough comparison.

First we could calculate the fee as a percentage of the investor’s return. For example, for a 1 year Personal Loan with a 6% investor return, Squirrel’s fee is 0.95%, making up 13.7% of the total of 6.95%. While for a 5 year D-grade loan returning 7.5%, the 2.95% fee would equate to a whopping 28.2% of an investors return!

Secondly, we could calculate the fee as a percentage of a borrower’s total interest payment (therefore factoring in the Reserve Levy into the calculation). For example, for a 1 year Personal Loan, the total interest paid by a borrower is 7.95%, so the 0.95% fee equates to 11.9% of that amount. For a 5 year D-grade loan, the 2.95% fee would equate to 17.4% of a borrower’s 16.95% interest rate – a lot more reasonable and in line with Harmoney and Lending Crowd whose mid-range of fees are both 17.5%!

LoanFee
As a % of the investor’s return
Fee
As a % of total interest
1 Year
A-Grade
6% return
13.7%11.9%
3 Year
B-Grade
6.5% return
23%17%
5 Year
D-Grade
7.5% return
28%17.4%

My experience – Fees

The fees look quite expensive if you look at them as a % of an investor’s return – 28% in one case! On the other hand, when looking at the fees as a % of total interest (including the Reserve Levy), the fee is reasonable (up to 17.4% in my example above). My second method is probably the better way to compare fees, as the Reserve Levy should really be factored into investor returns, given it is ultimately paid out to investors in the form of reimbursements for defaulted loans.

Overall I am happy with Squirrel’s fee. Although the fee works out roughly the same as Harmoney or Lending Crowd (both of which I felt were expensive), I feel Squirrel’s fees are acceptable for the lower level of risk you’re taking on.


Example breakdown of interest payments

Now that we’ve covered the three parts that a borrower’s interest payments get broken up into, let’s take a look at the % breakdown for 3 example loans:

LoanPart 1
Your Return
Part 2
Reserve Levy
Part 3
Squirrel’s Fee
1 Year
A-Grade
@ 7.95%
6%1%0.95%
3 Year
B-Grade
@ 11.45%
6.5%3%1.95%
5 Year
D-Grade
@ 16.95%
7.5%6.5%2.95%

5. Platform Features

Squirrel’s interface is simple, yet packs in heaps of features. It is perhaps the best in New Zealand.

Secondary Market – Squirrel is the only major P2P Lending platform in NZ with a Secondary Market. Here you can sell your loans and get your money out early, before the term of your investment ends. For you to sell a loan successfully, there needs to be another investor on the platform willing to buy your loan. This shouldn’t be a problem right now given the high demand for loans to invest in. There are no fees for selling your loans on the secondary market.

Auto-invest – This allows you to automatically place an investment order once your cash balance reaches a certain amount.

Auto-withdraw – This allows you to automatically make withdrawals to your own bank account, either weekly, fortnightly, or monthly.

Mobile interface – Squirrel has native mobile apps for iPhone and Android, although the platform still works fine on a mobile browser.

Email notifications – You get a weekly email notifications from Squirrel summarising your investment i.e. how much you have invested in each term, how much money you have in investment orders, and so on. Squirrel also sends regular emails to investors, with platform updates and news.

Reporting – The reporting provided on the platform is a basic but sufficient list of the loans you’ve invested in, which you can expand to see all your transactions for a loan.

My experience – Platform features

I don’t use auto-invest or auto-withdraw, as it’s easy enough to do these things manually. But all these features can make things super convenient – you could manage your Squirrel investments without having to log in to the platform at all!

I think the Secondary Market is excellent as it gives investors liquidity without any penalty. I don’t intend to use it, but it’s an extra safety net which allows you to get out of your investment sooner (and perhaps makes Squirrel a good parking sport for money you need in the short to medium term, if you’re willing to accept the risks). It’s one reason why Squirrel has become one of my largest investments.

6. Other Talking Points

1 year Personal Loan rollover

Squirrel’s 1 year Personal Loans roll over into a 5 year amortising loan (where the borrower pays interest + principal) at the end of the term, assuming the loan hasn’t already been paid off or refinanced into a mortgage.

If you’ve invested in a 1 year Personal Loan, near the end of the term Squirrel will email you asking if you want to have your loan rolled over. If you don’t want it rolled over, Squirrel will automatically sell the loan on the Secondary Market for you.

Loan availability

I spoke about low loan availability in both my Harmoney and Lending Crowd reviews and Squirrel is no different. Availability of Personal Loans to invest in on Squirrel can really suck at times. At the time of writing, the queue for Personal Loan terms are:

  • 1 year – over $400,000
  • 2-3 years – over $350,000
  • 5-7 years – over $1,400,000

Any investment orders you put into these products will require weeks of waiting to be matched to a loan. The wait can especially bad in the 2-3 year term as most borrower demand is in the 1 year and 5-7 year terms. This can be frustrating as you don’t earn interest on money waiting to be matched.

It is much easier to invest in Home Loans and Business Property Loans where there is almost always loans available to invest in without having to queue behind other investors.

Launchpad

Partially in response to low loan availability, Squirrel have recently announced Launchpad. This is a product where those with high income, but not enough money for a house deposit, can borrow part of their deposit through a Squirrel 5 year Personal Loan. This is expected to increase borrower demand in the 5-7 year Personal Loan product.

Retail Investors

Loans on Squirrel are currently mostly funded by retail investors. Squirrel and wholesale investors will only invest in loans if there are not enough retail investors to fill demand for loans.

Platform reliability

The platform has been very reliable apart from a few times where I’ve experienced minor glitches, such as balances not showing up correctly. Squirrel have been helpful and friendly every time I’ve reported these issues to them, promptly resolving any problems.

Conclusion

Squirrel offers lower returns, but at a lower risk (thanks to the Reserve Fund), and much less effort required, compared to other P2P Lending platforms. It is almost a hybrid between P2P Lending and a term deposit, but still manages to provide a potential return much greater than the bank. Their Secondary Market also provides an additional safety mechanism for investors.

In addition, Squirrel have continued to innovate and improve their product offering for both investors and borrowers, offering new products such as Business Property Loans. Meanwhile, other platforms like Harmoney have completely withdrawn from the P2P lending market.

These reasons are why Squirrel has been the best P2P Lending platform for me. While I’ve stopped investing with Harmoney and Lending Crowd, I intend to keep my Squirrel investment ongoing for its great low maintenance returns that roll in every month. I just wish they had better volumes in the Personal Loan products to make reinvesting my money easier (as money from loan repayments does build up quite fast).

I don’t think Squirrel is for everyone though. It’s not ideal for those investing smaller amounts, nor is it for those wanting to take on more risk to get higher potential returns, and those who want more control over things like risk grades. Lastly, it may not be the easiest investment to understand (so hopefully my review made sense!), and there are plenty of nuances in the platform that I did not cover in this review.

Pros

  • The Reserve Fund provides a strong layer of protection against loan defaults
  • The platform only accepts high quality borrowers
  • It’s more hands off compared to other P2P platforms
  • The Secondary Market allows you to get your investment out early without penalty

Cons

  • Your potential returns are lower than other P2P Lending platforms
  • A high minimum investment is required ($500 in each loan)
  • Loan availability can be frustratingly low at times
  • The platform can be difficult to understand for new investors

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Disclaimer

The content of this article is based on my personal opinion and should not be considered financial advice. The information should never be used without first assessing your own personal and financial situation, and conducting your own research. You may wish to consult with an authorised financial adviser before making any investment decisions.