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 can’t provide.
But it is also important to understand who the borrowers are and what they are planning to do with the money that has been 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 happens to fall over the course of a loan?
In 2016, former head of the FCA, Lord Adair Turner, warned that some P2P firms were trying to automate the lending process and that proper credit checks were not being completed.
Our experienced underwriting team analyses every loan application, and we only make short-term loans (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.
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 don’t openly publish it.
Past performance is not a reliable indicator of future success but at Octopus Choice, we have loaned more than £2.2bn 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 is 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?
Some products will have a secondary market, and some providers will be able to use their balance sheet to facilitate withdrawals – while others may lock investors in for the duration of loan terms. It’s important you know what your clients are investing in.
8. And finally – what’s in it for me?
Is the platform or product adviser-friendly? Does the product make it easy for you to manage multiple clients at once – or facilitate adviser charging?
