Rates & fees
How do I understand the rate of return on my investment?back to top
Investors earn a return on their investment by making loans to borrowers and receiving interest payments on those loans. There are three key return metrics to consider; Target Annualised Return, Expected Annualised Return, and Current interest rate. These metrics are described in detail in the sections that follow.
Please note: Your money doesn’t start earning interest until it is lent out. When money is in your holding account ('Wallet') or in the queue to be lent out, it will not be earning interest.
What is the Target Annualised Return?back to top
The Target Annualised Return is the annualised return we are targeting to achieve for your investment, once your money has been lent out. This rate is displayed in your Lending Works dashboard under ‘This week's rates’ and ‘Next week's rates' and is emailed to you in the Friday lender email each week.
The Target Annualised Return may change each week based on the supply and demand of retail investor funding and loans, however in practice rates are often very stable. If the Target Annualised Return does change while your money is waiting to be matched against loans, you’ll receive the new interest rate as opposed to the interest rate when you initially made your funds available to lend.
What is the Expected Annualised Return?back to top
The Expected Annualised Return is the current expectation of the return you will earn on your investment, based on the up-to-date performance of the loan portfolio and the economy as a whole (i.e. this figure factors in loans going in to arrears or default as well as macroeconomic factors). A summary of our analysis on the performance of the portfolio is published on our website and emailed to customers on a quarterly basis, which includes any updates to your Expected Annualised Return.
The Expected Annualised Return is the return you are expected to earn over the lifetime of your investment on the loans you have funded, calculated on an annualised basis. Your Expected Annualised Return, calculated for each annual cohort of loans, is shown in your Lending Works account.
The intention is for the Expected Annualised Return to remain the same as the Target Annualised Return throughout the life of your investment. However, if the performance of the portfolio or economy worsens beyond the tolerances built into the initial credit modelling, then it is possible that the Expected Annualised Return will reduce so that more money can be diverted to the Shield to protect all retail investors against individual losses on their loans. Where the Expected Annualised Return for investors is reduced, all of the proceeds from this reduction are automatically transferred into the Shield.
What is the current interest rate on my loans?back to top
The current interest rate is the actual interest rate you are currently earning on any given loan at that exact moment in time. It is possible for the current interest rate to fluctuate relative to the original Target Annualised Return to account for the timing and profile of loan defaults, which can be caused by changes in the performance of the portfolio or the wider economy.
If this is the case, and the current interest rate is reduced, then 100% of the variance is diverted to the Shield to ensure it has enough funding to protect against forecast loan losses. It is possible that the current interest rate will fluctuate fairly significantly and, in some cases, for short periods of time. It’s important to note that the current interest rate does not represent the total return on your investment, which may be higher or lower.
Furthermore, it is possible for the current interest rate to become negative, whereby an additional Shield Contribution Adjustment is deducted from any capital repayment, in addition to the interest being diverted to the Shield. Where this is the case, once again, 100% of the Shield Contribution Adjustment is transferred automatically to the Shield to protect against defaulted loans. You can see any Shield Contribution Adjustments made from your account in your transactions export and in your monthly account statement.
Given the potential volatility of the current interest rate throughout your investment, it is not displayed in your loan book download file as it may distort any analysis of your investment returns. Instead, we recommend you consider the Expected Annualised Return, which considers the expected performance of the loan portfolio over the life of your investment, as opposed to that single moment in time.
What is an 'annualised return'?back to top
The interest rates you'll see on our website are an 'annualised' rate of return. An annualised return illustrates what the interest rate would be if paid and compounded each year. Interest on Lending Works' loans is calculated daily and paid monthly, so the annualised return includes the effect of compound interest i.e. it assumes your interest earns interest too.
The annualised rate assumes that all repayments (both capital and interest) are reinvested, in much the same way that the return on any savings account (Annual Equivalent Rate or 'AER') assumes you keep your money, and any interest earned, in the account. The only difference is that with peer-to-peer lending your funds need to be kept 'on loan'; funds left in your Lending Works Wallet do not earn interest.
Servicing feesback to top
Lending Works does not directly charge investors any fees for servicing the loan portfolio. Instead, we make money from the arrangement fees paid by borrowers in relation to each loan and a small spread between the borrower and lender interest rates.
Quick Withdraw feesback to top
If you need early access to any money which is still on loan i.e. before it's been fully repaid by borrowers, it is possible to sell some or all of your loan chunks to other investors via our Quick Withdraw facility. Once we receive your request, the sale of your loan parts will typically take place within one working day - provided the Quick Withdraw facility is currently available and there are sufficient funds in the lending queue waiting to be matched.
Whether you incur a fee or not will depend on your choice of investment product. If you wish to sell loans within the 'Flexible' product, there are no Quick Withdraw fees. We’ll also cover any discount if the current lender rates are higher than those on your loans.
If you’re looking to sell loans within in the 'Growth' product, we charge a small fee of 0.5% of the amount sold, and there may be an additional fee to cover the discount if the current lender rates are higher than those on your loans, to ensure the investor(s) acquiring your loans receive the advertised rates of return.
How does Lending Works make money?back to top
Like any business, we need to make money to cover our overheads and be sustainable - otherwise we wouldn't be around for very long! We charge an arrangement fee to the borrower in relation to each loan matched, in addition to a small spread between the borrower and lender rates.