Peer-to-peer lending interview with The Lending Works CEO
The peer-to-peer lending industry appears to becoming more and more mainstream. Today I was able to explore this industry even further when Lending Works founder and CEO, Nick Harding, agreed to answer some questions on the peer-to-peer lending sector. I hope this helps you as much as it did me.
1. I’m worried what will happen if my peer-to-peer lender goes bust. Will I lose my money?
Lending Works holds all lending funds within a ring-fenced Trust, the structure of which is specifically designed to protect our lenders. This Trust is administered by a not-for-profit company, Lending Works Trustee Limited. The funds held within the Trust are completely segregated from the day-to-day operations of Lending Works, meaning that these funds cannot be used by the company to pay for its operational costs. These funds also cannot be used by any other third party apart from the back-up service provider. For more detail, see: What would happen to my loan contracts if Lending Works didn’t exist?
2. What are my expected returns from peer-to-peer lending?
The current annualised returns from Lending Works, after fees and estimated bad debts, are:
- 1 year – 3.3%
- 2 years – 3.8%
- 3 years – 4.1%
- 4 years – 4.8%
- 5 years – 5.6%
Compare this to TescoBank (who actually offer fairly competitive rates for the banks) and the equivalent rates are 1.55%, 1.8%, 2.2%, 2.65%, 2.9%.
Therefore, your expected returns with peer-to-peer lending can be almost double to bank equivalent.
3. Who are these “peers” that I will be lending to? Can I choose who I lend to?
No, we perform the risk analysis on behalf of our lenders. The reason that Lending Works operates that way is because we do not expect our customers to be financial services professionals. Instead, everyone in our team is a financial services expert. Our team of underwriters have all been handpicked from financial institutions and our board have been in senior positions at banks and top four professional services firms.
In order to protect our lenders, we have meticulous underwriting and very high standards. Most of our borrowers are homeowners, all are highly creditworthy, can afford to repay their loan, do not have too much debt outstanding and all have a clean credit history. Furthermore, they have all been contacted by telephone, often a number of times.
4. Do you see the peer-to-peer lending industry branching out into crowd funding sector? Is there any overlap between the two?
Question provided by moneystepper reader Liam Davies…
No we do not. We think that the crowd funding sector is very interesting as a concept, however our expertise is, and will remain in providing debt. We understand why connections are made between the two industries but they are really very different. The personal loans that we provide are agreed through a legal contract that is governed by the Consumer Credit Act, just the same as with a debt to a bank. This means our default rates are and will remain extremely low (currently 0.00%).
The chances of success with crowd funding vary. I believe that some investors do very well, whilst others have not been quite as successful. The rewards can also be much higher in crowd funding, however as is often the case the risks are significantly higher too.
5. How do peer-to-peer companies make money? What are their fees?
We understand that people are unhappy with the opaque nature of the fees that traditional financial institutions charge, that’s why we are different and we are very transparent. We charge a small fee to the lender and a small fee to the borrower. Lender fees are capped at 1% of the amount lent and all returns on the website are stated after fees have been deducted. Borrower fees are only payable if the borrower decides to accept your loan. This fee is clearly stated and included in all quotations and any APR figures.
6. Can I lose money by lending peer-to-peer? If so, how can I minimize the chance of this happening?
Whilst much has been written about the fantastic returns offered to lenders by peer-to-peer lending platforms, it is important to fully understand the risks involved too. However, peer-to-peer lenders are not shy in highlighting the key risks and how each of these has been mitigated.
7. I need my money in 2 years’ time for a certain purchase? Can I choose this specific term to lend to my peers?
Yes, you can lend your money for two years, then apply auto lend for one year to maximise your return on the money that is repaid into your account. Alternatively you can use the Quick Withdraw facility to withdraw your money from loans that are outstanding. A fee applies for customer who use quick withdraw, however it is capped at £20 or 0.6%.
8. Are the traditional banks your competition, your partners or your customers?
Our relationship with banks is quite interesting. Initially they did not pay a great deal of attention to peer-to-peer lending, however increasingly they are becoming intrigued in what we are doing. They of course are our competition as they offer a similar product to us, however their version is often much more expensive for customers.
9. On a personal level, what is your favorite thing about peer-to-peer lending?
I have two: Providing customers with what they want in a fair way, where they really benefit. And creating something new that is and will continue to dramatically change financial services for the better.
So, I hope you benefitted from the interview and learned a thing or two about peer-to-peer lending from it. Let me know what you think about the industry? Is it a good alternative to banks? Are you excited about it being allowable in an ISA later in the year?
Alternatively, if you are interested in peer-to-business lending (like we are), then why not check out our Funding Circle review.