Rate v risk: the savings v P2P dilemma

Written by Rebecca O'Connor on 6th September 2016

More than 300 savings accounts saw rates cut in August after the Bank of England reduced the base rate by 0.25 percentage points, almost drawing an end to the nation’s favourite money habit.

The natural next step up the risk curve for many savers looking for SOME kind of reward is peer to peer lending.

With rates around 5 per cent available for lending your money to someone else or a business, it’s not surprising that P2P is gaining popularity.

However the regulator has concerns that people do not always fully understand that the risks are higher than on savings accounts – especially concerning as P2P loans are set to gain tax-free ISA status later this year.

Even more confusing – not all P2P loans are born equal: some are riskier than others.

Mike Profile Pic

Michael Todt, from Lending Works, a personal lending platform explains how they do it to Good With Money.

– Do you think savers really understand that P2P carries greater risk than saving?

I believe there are still people who make direct comparisons between P2P lending and saving, which, of course, is not an accurate comparison to make.

However, as a platform we go the extra mile to ensure that all our lenders are fully informed about the risks involved with P2P lending, and that there is no coverage from the Financial Compensation Services Scheme for capital losses. After all, we want our customers to be making decisions about where to invest their hard-earned money with all the facts at their fingertips so that they can rationally weigh up the rewards against the risks. So while some savers may not fully understand that P2P carries more risk than savings accounts before they visit websites like ours, we believe that after having reviewed the information available on our site, they will be well placed to make informed decisions.

– What measures do LendingWorks put in place to ensure that lenders understand where their money is going?

On our website are three pages with comprehensive statistics pertaining to our borrowers, our lenders and risk and return. On the borrower statistics page, lenders can get a good idea of who they are lending to, while the risk and return page allows them to view our levels of arrears and defaults, and they can even download our loan book.

In addition, our ‘Safe’ page outlines the process of how their money is lent, the processes involved with this, and what measures we have in place should the borrower go into default.
Furthermore, we also have a dedicated customer line, whereby lenders can speak to real people, who are on hand to provide expertise on this, or any other queries which they may have.

– How does LendingWorks mitigate risk? Is this different from other P2P lending platforms?

Our risk mitigation centres on two main forms of lender protection. Firstly, if an approved borrower slips into arrears, or even default, we have a segregated reserve fund, which is continually topped up as a portion of the fee paid by borrowers. This fund steps in immediately if a borrower falls behind on their repayments so that the lender receives what they’re expecting, when they expect it. Of course this is not guaranteed but it does mitigate the risk.

Secondly, Lending Works has a unique insurance arrangement – the first of its kind in P2P lending. This covers certain specific credit risks such as accidents, illness, unemployment and death of borrowers; the policy also covers fraud and cybercrime. This Shield has ensured that every penny of capital and interest has been returned to lenders on time since our launch in 2014.

– How have lower interest rates affected P2P lending?

If anything, lower interest rates have had a positive effect on the level of interest in our sector. It should be noted that Bank of England rates have no direct bearing on our lender returns. Instead, our rates are determined by the equilibrium of demand and supply of loans, meaning the rate is effectively set by the market. The recent widespread cutting of savings rates and volatile returns on other investments will only serve to make P2P lending even more attractive.

– What do borrowers usually want the personal loans for?

The most common reasons borrowers take out a personal loan with Lending Works are for car finance, home improvements and debt consolidation. However, we also see a lot of borrowers using the money for lifestyle events like weddings and holidays, and even reasons such as attaining pilot licences, cosmetic surgery and purchasing motorbikes for racing.