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Sunday, 27 March 2016

UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk by Assessing Platform Health

In my previous post, I outlined some of the factors leading to PtPL losses.  In this post I’ll look specifically at the risks associated with individual PtP platforms.  By the way, don’t believe the likes of Lord Adair Turner with his ‘Peer to Peer is Doomed’ nonsense.  Lord Turner has significant interest in a traditional business loans company hence his (biased) condemnation of Peer to Peer Lending!

I’ll ignore the big three; Zopa, Ratesetter and Funding Circle as their returns are relatively low (typically 4% - 7%) and the first two have provision funds to (hopefully) cover any losses.  The sites I favour pay 12% or more but with this comes obvious increased risk.  Typical examples are Saving Stream, Funding Secure and Money Thing. 

These platforms offer all their loans secured against material assets such as land, property, cars, boats, planes and works of art.  Incidentally, this is a much better deal than Funding Circle, where most of the loans are unsecured and the buyer must therefore factor in defaults with limited or no recovery of capital or remaining interest.

Here are two key ways to evaluate these platforms:

Number ONE:  Look at the state of the Secondary Market

These three platforms each have a secondary market where you can buy and sell loans held by other people rather than buying new loans.  But why would you want to do that, I hear you ask?  Well, you may wish to buy additional loans in order to diversify, ie spread your cash across more loans rather than waiting for new loans to appear.  Alternatively you may want to suddenly withdraw some cash rather than waiting until the end of a loan.

So what to look for?  After Christmas 2015 there was a UK PtP loan famine.  In other words there was nothing available on the secondary markets.  This is good news if you are selling loans but frustrating if you want to buy.  Now (late March) there is something of a glut.  The three platforms I mentioned all have loans to buy on the secondary market. 

What to look out for is platforms with too much on offer on the secondary market  or worse still new loans that are not fully funded.  If the platform offers the ability for sellers to off load unwanted loans at a discount, then are there a lot loans offered at a discount that are still not selling?  This may suggest that lenders are keen to offload existing loans even at a loss.  You then need to find out why they may be unhappy with the platform.  This brings me neatly to the second point.

Number TWO: Read the PtP Independent Forum 

The forum is UK-based but is also frequented by lenders in mainland Europe.   The financial expertise on this forum is amazing.  Find out what experienced lenders think of each platform and the quality of loans being offered.  Do others share your concern about a particular platform?  Use the forum to find out the default record of individual platforms and how often the capital and unpaid interest were eventually recovered.

Finally, as long as you keep well informed and don’t lend what you can’t afford to loose, I think you'll find PtPL is a much safer bet than playing the stock market roulette!