Summary of a post.
What are the risks involved with P2P lending?
Whilst much has been written about the fantastic returns offered to lenders by peer-to-peer lending platforms, it is important to fully understand the risks involved too. We have therefore set out the key risks and how each of these has been mitigated by Lending Works.
Borrower defaults
Whilst Lending Works only lends to prime, creditworthy borrowers who not only have an excellent credit history but can also demonstrate that they can afford their loan, there does still exist the risk that some borrowers may default on their loans. This could be due to unforeseen circumstances such as a loss of employment or ill health, or it could be due to something more sinister such as a deliberate attempt to defraud.
Borrower defaults could negatively impact the returns lenders receive. As such, Lending Works has gone the extra mile to ensure that lenders receive exactly what they expect by creating the Lending Works Shield. The Shield is both a reserve fund, which pays out in the event of missed or late loan repayments, and a series of insurance policies which protect against borrower defaults, fraud and cybercrime. No other peer-to-peer lender offers this.
Contingency fund:
The Shield contingency fund is designed to comfortably cover the company’s expected rate of missed and late loan repayments, and is constantly topped up using part of the arrangement fee and interest paid by each Lending Works borrower. In the event of any missed payments by borrowers, the contingency fund makes the expected payments to lenders instead. If money is subsequently recovered from borrowers this gets paid back into the contingency fund.
However, please note that the interest rates retail investors receive on loans from the Shield are variable, to account for variations in the performance of the loan portfolio.
Insurance:
Lending Works has taken out a series of insurance policies which protect our lenders against the risk of borrower defaults, fraud and cybercrime. No other peer-to-peer lender offers this.
It should be noted that peer-to-peer loans, unlike traditional savings, are not covered by the Financial Services Compensation Scheme (FSCS).
The P2P platform goes out of business
Lenders often ask what would happen if the P2P platform through which they lend their money no longer existed, for example if the platform provider failed. The Financial Conduct Authority (FCA) took over regulation of the P2P sector on 1 April 2014, and made it mandatory for platform providers to have contingency arrangements to manage their loans in the event that they no longer existed.
Lending Works already had these arrangements in place prior to 1 April 2014 with a back-up services provider. Since the contracts are directly between lenders and borrowers, the services provider would effectively manage the company’s loan book to maturity to ensure that payments from borrowers are received as scheduled and capital and interest payments are returned to lenders as expected. For this service, the back-up services provider would take a fee. So, whilst this would slightly impact returns received, lenders have increased confidence that their loan contracts are safe.
In addition, all lending funds are held in a ring-fenced Trust, completely segregated from the day-to-day operations of Lending Works. The company has no access to these funds and so in the event of a platform failure all un-lent funds would be returned to lenders.
Your money may not be lent straight away
Once you transfer money in and make it available to lend, interest is only earned once your lending offers get matched to borrowers seeking a loan over the same term. There does exist a risk that it takes some time to match your offers and therefore your returns are slightly less than expected. This is sometimes known as 'cash drag'.
Lending Works has a sophisticated algorithm called the ‘Fair Algorithm’ which allocates lending capital in the fairest way possible. This takes into consideration the length of time that a lender has had an offer outstanding and also the value of lending capital on the offer, to ensure that the time taken to match offers is minimised. We are constantly working to reduce the time taken to match offers to ensure that lenders receive exactly what they expect.
Don't forget...
Our innovative Quick Withdraw facility provides lenders with the option to access their money while it is still on loan with borrowers, provided there are other lenders available to purchase your loans. There is no charge for selling loans held under the Flexible product. However, if selling loans held within the Growth product, we charge a small fee for using Quick Withdraw of 0.5% of the amount being sold. Also, if the rates on your loans are lower than the current lending rates, you'll be charged an additional fee to ensure the lenders acquiring your loans receive what they're expecting.
You may also like our guide: Is peer-to-peer lending safe? Risks & Regulations
Related articles:
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
As with all investments, your capital is at risk.
- Summary of a post.
- Summary of a post.
In line with our risk management framework, today we published our Q4 2019 performance update.
As a platform, we take great pride in all that we've achieved since opening our doors for business nearly six years ago. We’ve
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
Featured
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
There is a variety of literature and research illustrating the importance of building brand loyalty, albeit with some degree of variance.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The idea of peer-to-peer (P2P) lending is a simple one; you lend money to those who wish to borrow, with a view to receiving a great return for doing so.
Most popular
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
- Summary of a post.
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?
Recent
The Lending Works Shield does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The Lending Works Trustee has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Lending Works Shield when considering whether or how much to invest. For more information click here.