Is your client lending in the mere hope that they will get their money back, or is there a tangible security that can be called upon if a borrower were to default?
Unsecured lending is worlds apart from secured lending – we think the latter is far less risky because if the worst case scenario were to happen, the underlying asset can be sold and the lender has the opportunity to get most or all of their money back.
4. Who are the borrowers?
Each P2P platform tends to appeal to specific types of borrower, be they individuals or businesses, with widely varying motivations and associated risk profiles.
In our case, borrowers tend to be property professionals who need a level of speed and flexibility that traditional lenders simply cannot provide.
But it is important to understand who the borrowers are and what they are planning to do with the money that’s lent to them. Does the lender know?
5. How good is the underwriting?
Once you know who the borrowers are, the next stage is crucial: how are they assessed? What sort of credit profiling is undertaken? And if loans are secured, what assets are they secured against? How are they valued, and what level of buffer is there in case that value was to fall over the course of a loan?
Back in February this year, the former head of the then Financial Services Authority, Lord Adair Turner, warned that some P2P firms were trying to automate the lending process and that proper credit checks were not being completed.
A peer to peer lender should have an experienced underwriting team that analyses every loan application.
Keeping the loans short-term (typically around 18 months but up to a maximum of five years), secured against residential property on conservative loan-to-values of, on average, 59 per cent, should also help to minimise the risk.
6. What’s the loss rate?
This is the essential yardstick of good underwriting. So always ask the P2P lender for their loss rate and be wary of lenders that do not openly publish it.
Past performance is not a reliable indicator of future success but at Octopus Choice, we have lent more than £2bn over the past seven years, and lost less than 0.00001 per cent (under £6,000).
7. How easy is it to get out?
It’s all well and good if it’s easy to invest but how do your clients access their money when they need to? Does the product carry a fixed term, or can investors choose to withdraw at any time? And are there any costs or penalties for doing so?
