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Selecting a peer-to-peer lending platform

This article is part of
Guide to Peer-to-Peer

The very first thing investors should do is find out about the people behind the platform, according to Neil Faulkner, co-founder of peer-to-peer lending risk-ratings agency 4thWay.

He says advisers and their clients should expect to see relevant experience at credit assessment, loan origination and underwriting, “and it is even better if you see the phrase ‘quantitative risk modelling’ as well”.

Mr Faulkner says checks need to be made to ensure the platform is legitimate and regulated.

In terms of delving into the business model, Mr Faulkner says investors want to look to see that the platform focuses on either very high quality borrowers or on fantastic security, or both, which means low loans-to-values and low historical bad debts for example.

On returns, Mr Faulkner says investors should make sure they are getting a decent premium over interest rates in savings accounts and cash Isas.

He says it is vital advisers make investors understand the need to establish how to spread the risk across several platforms and lots of loans.

Mr Faulkner says: “Ideally you’ll lend in 100 to 200 loans for low-risk lending and hundreds more if you go up the risk scale.

“Particularly in the event a recession occurs during the period, investors should be prepared to lend regularly and re-lend repayments for five years (and even, for a portion of your money, a bit longer).

“If you try to exit loans early during a recession investors might only be able to do so by accepting back less than they lent out.”

Advisers should make sure their clients are aware this is a swift moving market, Mr Faulkner added.

He says it is essential to keep tabs on the chosen peer-to-peer lending websites by signing up to independent alerts services that keep track of dozens of indicators that borrower selection standards have been reduced, or that interest rates have sunk too low to cover the risks involved.

Finally, he says investors should be made to grasp they should stop lending if a platform breaches their clear, written-down lines in the sand, e.g. if it increases its loans-to-value above 80 per cent or its borrower acceptance rate goes over 25 per cent.

John Goodall, chief executive and co-founder of Landbay, says advisers should look to see if the lending platform understands expected default rates and actual default rates.

All nine members of The Peer-to-Peer Finance Association - Funding Circle, Landbay, Lending Works, LendInvest, Madiston LendLoanInvest, MarketInvoice, RateSetter, ThinCats, and Zopa - are mandated to show these on their site in a consistent fashion.

Mr Goodall says advisers should ask ‘what does the platform do with default statistics – how are they planning to deal with defaults’.

The first thing to consider here is the accuracy of the projected default rates. How have they been modelled and do they consider more macro-economic factors?

Mr Goodall says: “Stress tests help us to understand a portfolio’s behaviour as, say, unemployment rates rise or house prices fall.