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!

UK Peer to Peer Lending (PtPL) – Identifying and Managing Risk and Tips to Avoid Losses

Evaluating Financial Risk

Provision Funds

Platforms such as Ratesetter and Zopa include a provision fund to cover any expected defaults.  This is one reason why the rates of interest offered are relatively low.  The best interest on offer is between5% and 6% with Ratesetter if you are prepared to lend your money for 5 years.

This post will focus on platforms with no provision fund where defaults may directly affect the returns available to the lender.

Unsecured Loans

Funding Circle (FC) provide an estimate of the percentage loans expected to default, based on historical data for each class of loan.  However, their loans are typically for small businesses and the failure rate, in my experience, may be higher than the FC prediction and recovery rates are relatively small because the majority of their loans are unsecured (ie not underwritten by a tangible asset such as property or land).

Secured Loans at 12%

I now avoid unsecured loans and prefer platforms such as Saving Stream and Money Thing.  Saving Stream loans are almost exclusively secured against property and land while Money Thing has a broader mix of assets that also include artworks and portfolios of goods such as electronics or jewellery.  Surprisingly these sites both offer annual interest of around 12% with no fees charged to the lender.   

Minimising Losses

My tip to minimise losses is to spread your money across as many loans as possible.  Another tip is to further diversify by lending through several PtPL platforms.  You should also assess the risk associated with individual loans.  For example, if property is to be developed, is the business case for the loan realistic based on current market conditions?

Accuracy of Valuation

Something important to consider is the accuracy of the valuation of the asset.  Platforms usually quote the Loan To Value (of the asset), abbreviated to LTV, as a percentage.  So, for example, a loan for £100,000 secured by an asset worth £200,000 would have an LTV of 50%.  The lower the LTV the less likely you are to lose money due to a default coupled with a poor valuation. 

Beware works of art where the estimated value may be optimistic depending on the state of the market and current fashions.  In the case of a default, the actual value of the asset must cover money owed to the platform, the lenders capital and interest as well as selling costs, legal fees, transport costs etc.

Evaluating PtPL Platforms

In my next post I’ll explore how we can evaluate the risk in individual PtPL platforms and identify how likely they are to have loans that default where the capital or interest owed are not fully recovered.

How to DO Peer to Peer Lending (PtPL) – Part 2

Practical Peer to Peer lending Advice

In my previous post  I gave tips on how to try PtPL with minimum risk.  I covered platforms such as Ratesetter (RS) and Funding Circle (FC).  In this post I shall look at Asset-based Lending on platforms such as Saving Stream (SS), Money Thing (MT) and Funding Secure (FS).  These offer far higher rates of interest with some (manageable) risk as well as making it relatively easy to get your capital back quickly via a Secondary Market.

These 3 asset-based PtPL sites reduce risk by securing each loan against a tangible asset such as property, art works, land, cars, planes or industrial machinery.  In the event of a default, the asset can be sold by the platform and the proceeds used to pay back the lenders.  The main risks are therefore platform failure or the asset valuation being too low.

These sites typically offer shorter loan terms than sites like Ratesetter.  Ratesetter’s best rate is over a term of 5 years and pays typically 5-6%. 

Saving Stream pays 12% for a bridging loan of typically 12 months.  In practice these loans may be redeemed earlier or continue for longer depending on progress of the development work required before the land or property is sold. 

In the current market, you can immediately sell loans without loss on the Saving Stream secondary market.  It is also worth noting that SS, MT and FS don’t charge any fees to lenders for buying or selling loans. 

While Saving Stream originally lent against boats, they now specialise in property and land.  Money Thing and Funding Secure offer a wider range of assets including cars and artworks.  More specialised sites, such as Ablrate, lend against aircraft, industrial plant and shipping containers with rates from around 10-14%.

It is obviously wise to spread your money across loans, asset types and platforms.  This minimises the risk of asset value collapse, platform failure or individual loan defaults.

Secondary markets are a useful means of further diversification for your existing loans and a channel to reinvest returned interest and capital on shorter term loans.

If you work full time then be aware that sites like Zopa and Ratesetter are relatively ‘hands off’ while the asset-based sites require more ‘hands on’ management.  You may also wish to look at the details of the individual asset-based loans, for example valuation reports, to make sure you are comfortable with the stated purpose of the loan.

So, finally, do give PtPL a shot.  Start with small amounts across several platforms and see how you get on.  But remember, don’t ever invest more than you can afford to lose.  Having said that, I think that you’ll find that PtPL is much less of a lottery than the stock market!