For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
A quick word on our lender rates
It may have come to your attention that, over the last six weeks, our headline lender rates have decreased. In the wake of the Brexit vote, and with the subsequent cut in Bank of England rates, many people might be inclined to draw a direct link between the two.
However, we thought it best to provide an explanation from our end as to why rates have dropped off slightly, and to provide clear reasoning so as to separate fact from fiction.
How our rates are calculated
This article we published over a year ago provides in-depth details of how we calculate our base rates, and, by extension, lender returns. However, the long and the short of it is that our lender rates are not directly dependent on Bank of England rates at all. Instead, our rates are determined by the demand and supply of loans from borrowers and lenders respectively, and the natural equilibrium this generates. This effectively means our rates are established by market forces, rather than any other ruling body.
The knock-on effects of recent events
Of course, that’s not to say that the peer-to-peer lending market itself isn’t susceptible to external forces. Since the Bank of England cut base rates to new record lows of 0.25 per cent, headline rates for borrowing have in turn plummeted across the lending industry. As a platform, it is thus understandable that, to remain competitive, there will be downward pressure on the rates at which we lend to borrowers – especially given our meticulous standards of credit underwriting, which will always ensure that only creditworthy borrowers are approved for Lending Works loans.
Unfortunately, a more competitive marketplace for the supply of loans, and the resultant drop in the rates being offered to borrowers, means that, in the case of peer-to-peer lending, lender rates are directly affected.
Compounding this is the impact of a subsequent decline in savings rates elsewhere, and the push factor it creates towards something like investing through a peer-to-peer platform. After all, rates being offered by banks and building societies have been derisory for a number of years now, but the manner in which these have been further slashed across the board over the last month has meant that, at Lending Works, we’ve seen a deluge of new lending capital enter our platform in that time.
Managing lender rates, and a look to the future
An additional consequence from this lack of competitiveness within investment and savings is that the lending queue for new investors has lengthened slightly too. Although the impact of this on lifetime returns is actually minimal, we understand the frustration that comes with this delay. Ultimately this is something we need to manage, and adjusting rates is a necessity in order to ensure that the right balance between the supply of lending capital and demand for loans is struck.
Yet while some might be inclined to think that this is a glimpse of the future for peer-to-peer lending, or some sort of ‘new normal’, we most certainly do not see it that way. Firstly, as a marketplace, we are always subject to the effects of black swan events, and it does invariably take time for the market to re-calibrate itself.
Yet being a nimble and agile company, we are best placed to meet such challenges head on, and with the efficient business model we operate, we have every confidence that we will be able to deliver a service to borrowers that will continue to set us apart from other lenders and credit providers, thus ensuring we always attract prime borrowers to our platform; and en masse too.
Furthermore, we have a number of exciting partnerships and projects which will be launching soon, and these will provide further impetus to the mix, and allow us to source more borrowers from an even wider array of channels.
So while there may be external forces at play which are creating a marginally less-favourable climate for peer-to-peer investors at the moment, we have every confidence that Lending Works will always provide a more compelling proposition than alternatives. Added to that, with the imminent launch of the new Innovative Finance ISA, and the considerable tax efficiency this will bring, the best days for lending through platforms such as ours are unquestionably still to come.
- The Brexit economy - two months later
- Our lenders show faith in P2P lending after Brexit vote
- Looking after your pension pot post-Brexit
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