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
Article 2Lending Crowd review
Article 3 – Squirrel review (this article)

1. Getting Started

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

Terms and minimums

With Squirrel you can choose to lend your money in one of three terms, with the 1 year option being unique to Squirrel:

  • 1 year
  • 2-3 years
  • 5-7 years

Squirrel’s minimum investment amount is $500 per loan. This is very high compared to Harmoney and Lending Crowd, who have respective minimums of just $25 and $50 per loan!

Investing in loans

To invest in a loan you need to place an investment order or ‘bid’ of at least $500 for the term you want to invest for (more about placing bids in the next section). 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! 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.

Once your investment order is matched with a loan, the borrower draws down your money and you’ll get an email saying that your investment is underway.

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 5-7 year term, as there is more demand for loans and higher rates in this term. However, there have been times where I’ve preferred the 2-3 year term as there are fewer investors to compete with in this term.


Borrowers and their repayments

Once a loan is drawn down, borrowers pay you back either fortnightly or monthly. 1 year loans are paid back with interest only, and 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 borrowers pay. The rate for 1 year loans is fixed at 7.95%.

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 largely depends on the term you invest in:

  • 1 year – fixed 6% return
  • 2-3 years – between 6.5% and 7.5%
  • 5-7 years – between 7.5% and 8.5%

While the return for 1 year loans is fixed, how is your return for the 2-3 year and 5-7 year terms determined? It depends on what interest rate you bid at when placing an investment order – for example, you can place bids between 7.5% and 8.5% for the 5-7 year term.

Squirrel uses a ‘lowest bid, first served’ method of determining which investors get matched to a loan – so a person bidding at 7.5% would be matched to a loan sooner than a person bidding at 7.6%. If multiple investors bid at the same interest rate, then investors will be matched to a loan using the ‘first in, first served’ method. Unfortunately this concept can be harder to grasp for new users, compared to Harmoney and Lending Crowd’s simple ‘first in, first served’ method.

Right now most bids are being placed at the lower end of the scale (e.g. at around 7.5% for 5-7 year loans), because there are so many other investors on the platform competing for loans. Across the whole platform, the average rate investors have been getting recently is 7.5%. This is lower than Harmoney and Lending Crowd who give investors the potential to earn up to 29.99% and 18.45% respectively (before fees), and both having average returns of around 12% (after fees).

My experience – What returns did I get?

My Squirrel portfolio is currently earning an average interest rate of 8.11%. 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 gradually fall as I reinvest my money at the current 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

Reserve Fund/Loan Shield

The main risk of P2P Lending is that a borrower defaults – in other words, doesn’t pay your money back. 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 reserve fund holds $458,224 at the time of writing, which is 3.05% of the active loan book (currently around $15 million). This provides more than enough protection from expected defaults, which is expected to be 1.13% of the active loan book.

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 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 the 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. This would take a big increase in the default rate from an expected 1.13% 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 on the platform – all investors 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.

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! Check out the below video if you want to hear more about the likelihood of the Reserve Fund being depleted.

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 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, 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:

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 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 8%, the 2.95% fee would equate to a whopping 26.9% 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 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
7% return
21.8%17%
5 Year
D-Grade
8% return
26.9%17.4%

My experience – Fees

The fees look quite expensive if you look at them as a % of an investor’s return – 27% 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%
7%2.5%1.95%
5 Year
D-Grade
@ 16.95%
8%6%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. Squirrel charges a small fee for this service – 1% of the loan you’re selling, up to a maximum of $50. 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.

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 – The platform works fine on mobile. Squirrel also has native mobile apps for iPhone and Android, but I haven’t bothered with these as they aren’t updated regularly.

Email notifications – You get a lot of email notifications with Squirrel including when you deposit money, when a borrower draws down your money, or when you get an early loan repayment. Although I don’t have an issue with them, it would be nice if you could turn off any notifications you don’t want to receive.

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 great. I don’t intend to ever use it, but it is an extra safety net which allows you to get out of your investment sooner. It’s one reason why Squirrel has become one of my largest investments.

6. Other Talking Points

1 year loan rollover

Squirrel’s 1 year loans are interest only, meaning the borrower only makes interest repayments throughout the 1 year term of the loan. After a year the loan rolls over into a 5 year amortising loan (where the borrower pays interest + principal) at a rate of 8%, assuming the loan hasn’t already been paid off or refinanced into a mortgage.

If you’ve invested in a 1 year 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 sell the loan on the Secondary Market for you (waiving the 1% Secondary Market fee).

Loan availability

I spoke about low loan availability in both my Harmoney and Lending Crowd reviews and Squirrel is no different. Loan availability on Squirrel is mostly steady, but can really suck at times. There are times when there are too many investors and not enough loans, so you can be waiting days and weeks for your investment orders to be matched. This can be frustrating as you don’t earn interest on money waiting to be matched.

Join the queue of $158,582 waiting to be invested into loans

Retail Investors

Loans on Squirrel are currently 100% 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, an issue which is unlikely right now due to the huge supply of investors’ money.

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 almost 3 times greater than a term deposit. Their Secondary Market also provides an additional safety mechanism for investors.

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 loan volumes 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

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

Confused? Check out the below video explaining how the Squirrel P2P Lending platform works:

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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.