Mini Guide to
P2P lending
What an investor should ask
before lending money into
the Peer-to-Peer market
Contents
Introduction3
What is Peer-to-Peer Lending?
4
What should an investor ask before
lending into the Peer-to-Peer market?
5
Conclusion7
Contact Us
2
8
Introduction
In the past decade Peer-to-Peer lending (P2P) has grown to become a viable and
attractive alternative investment option for people and organisations seeking better
returns. Low infrastructure and operating costs typically result in a better deal for
lenders than some other forms of investment. At the time of publication, lenders can
get a higher return on their investment from Peer-to-Peer lending than they can with
a bank savings account.
But Peer-to-Peer investments are not for everyone - they are not a savings product.
The industry is very broad with multiple platforms, and varying rates of interest and
approaches to risk. It is important to know how to choose the right Peer-to-Peer
investment to ensure you have a comfortable balance between risk and reward.
This guide aims to equip you with the knowledge of what to ask in order to make
an informed investment decision.
RISK
REWARD
3
What is
P2P Lending?
Peer-to-Peer (P2P) lending accounts for the vast bulk of alternative finance and
comprises of Consumer P2P Lending and Business P2P Lending. It is very different
from Crowdfunding but the terms are often confused and used interchangeably.
Types of Peer-to-Peer Lending and risk mitigation
Peer-to-Peer lending is not a savings product and does not fall under the
Financial Services Compensation Scheme (FSCS). Peer-to-Peer lending falls into
two categories and mitigate risk in the following ways:
Secured (asset-backed):
Secured Peer-to-Peer lending platforms mitigate the risk
of loss by having the borrower pledge an asset as security.
If the borrower does not repay the loan, the asset can be
sold and the proceeds used to repay Lenders.
Unsecured:
Unsecured lending carries increased risk that if the
borrower defaults investors may not get back all, or any,
of the money they invested. Unsecured Peer-to-Peer
lending platforms reduce risk by spreading investment
across hundreds or thousands of loans and some offer a
Provision Fund so if a borrower fails to repay, the lender
can apply to the Provision Fund for compensation.
4
What should an investor
ask before lending into
the Peer-to-Peer market?
The variety of platforms within the Peer-to-Peer market means comparison is not a
straightforward exercise and understanding the myriad different business models is
a challenge. There is no safety net other than your own risk assessment, so it is important
to know what to ask. It makes sense to find out everything you can about the platform,
the people that manage it, and the loans and investments that are listed with them.
When you are doing your research there are two key areas that you need to
assess: Platform Risk and Product Risk.
1
PLATFORM RISK
Things to ask and find out about the platform before investing:
The people behind it
Understanding who the people running the Peer-to-Peer business are. Who owns
the business and are they looking to build a sustainable business, or are they
looking to quickly build market share and then exit before the loan book has
gone through an economic cycle?
Expertise
Does the business have the financial expertise to assess the loan risk? Is this
done by people or using algorithms?
Longevity
How long has the business been running and what is its history of losses, both
as to number of defaults and amount of loss? Does it have a compensation fund?
Investors
Does the business also have institutional investors? Do institutional and private
investors get treated in the same way? Would the business be affected if the
institutional investors looked to redeem?
5
PLATFORM RISK CONTINUED
Profit
Is the business making a profit that enables it to be sustainable or is it relying on
raising additional capital to enable it to continue to pay the overheads of the
business?
Spend
Is the business spending unsustainable amounts on expensive advertising
campaigns, and bleeding edge technology ahead of delivering the revenue streams
to support it?
Fee structure
What is the charging structure and what behaviour does it encourage? Is its model
based on purely transactional fees or does it align its interests with the lender in
having an ongoing interest in the health of the loan from an annual fee?
Fees
Are the platforms fees to the borrower reasonable? Does the borrower have to pay
so much that it creates an unreasonable strain thus increasing the risk of default?
Regulation
Is the business regulated by the Financial Conduct Authority (FCA) and are staff
trained in data protection and anti-money laundering matters?
Security
How safe is your cash when un-invested? Does the business keep your money in a
client account that is designated as such by the bank and cannot be used by any of
the business creditors in the event of the business failing?
Transparency
Can you get answers to your questions? Can you speak to a person and if so do
they give you clear unambiguous answers?
6
2
PRODUCT RISK
The other key area to consider is product risk and making sure that you
understand what return you are getting, when you are getting it, and
what security you have in the event that the borrower is unable to pay.
Transparency regarding risks
You should consider whether the investment risks are clearly set out on the
businesses website and in the documentation that you have been given. Unlike an
investment manager or your financial advisor Peer-to-Peer platforms are not
authorised to give you advice, and you therefore need to read the information that
is available on each investment that you make. If you need additional comfort then
you must do your own research.
Liquidity risk
You need to understand the liquidity risks associated with this type of investment
and consider how long your money will be tied up for. You should find out if there
is a facility to exit the loan early, there may be a secondary market.
Concentration vs diversification
You need to consider concentration risk and whether you would prefer to spread
you money over a large number of loans where you may not be able to assess
each one individually, or whether you prefer to invest in a smaller number of loans
but do your own additional investigation work on each one.
Security
What is the nature of the security they accept? How is it valued? How much do
they lend against the value of the security (Loan to Value ratio)? Do you have a
registered interest noted on the title deed?
Defaults
What is the level of default? What process is in place in the event of a default?
What will the business do to try to recover your money, how long will this take
and what are the costs of recovery?
CONCLUSION
For those prepared to do the research there are some excellent investment
opportunities in the Peer-to-Peer market, where investors can not only earn an
attractive return with good security and control over their liquidity but can also
help regenerate communities abandoned by traditional lenders.
7
Contact Us
For further information about Folk2Folk and our
current lending opportunities please get in touch.
Visit: www.folk2folk.com
Call: 01566 773296
Email: [email protected]
Follow us on Twitter: @Folk2FolkUK
www.folk2folk.com
Your capital is at risk and is not protected under the Financial Services Compensation Scheme.
Folk2Folk Limited (Company Registration No. 08178576) is authorised and regulated by the
Financial Conduct Authority (FRN 720867). Our registered office address is NUMBER ONE
Business Centre, Western Road, Launceston, Cornwall, PL15 7FJ. VAT Registration No. 152145832.
LGV10717