The lending question – can you grow your capital and keep it safe?

3 very different reasons why Loanpad says it can

 

Like any investment vehicle, peer-to-peer (P2P) lending carries a certain degree of risk. As an investor keen to grow your nest egg or to expand your portfolio, you may be wondering how P2P platforms manage this risk in order to protect your capital.

 

Recently, the Collateral Companies[1] – which operated a UK-based P2P lending platform – came under the media’s spotlight for ceasing their lending activities and going into administration. It was reported[2] that the companies were trading without the necessary permission from the Financial Conduct Authority (FCA). The FCA have confirmed that “none of the Collateral Companies held any valid authorisation or permission to carry on regulated activities.”[3]

 

While the rest of the story is still to unfold, including details on whether Collaterals’ investors will get all their money back, this incident highlights two important issues:

 

• As an investor, it’s essential to do your own due diligence and make sure the lending platform you choose to invest with is authorised to operate in your financial market.

 

• It’s also advisable to gain a thorough understanding of the firm’s risk management model, so that you can judge whether it aligns well with your risk appetite, and your investment objectives and preferences.

 

How does Loanpad manage risk?  

 

Loanpad is a new P2P lending platform that offers an innovative lending model and a user-friendly online investing experience that’s attractive due to its simplicity and efficiency.

 

As with making any investment, your capital is at risk if borrowers do not repay their loans and the security is insufficient to recover the loan. However, Loanpad operates an investor-centric business model that aims to grow and protect your money.

 

Loanpad is also authorised and regulated by the Financial Conduct Authority (FCA); and authorised by HM Revenue and Customs (HMRC) as a manager of Individual Savings Accounts (ISAs).

 

Here’s how Loanpad aims to protect your investment:

 

1.  A vested interest

 

Loanpad is a matchmaker and does not originate loans directly. Instead, Loanpad partners with established property lenders (lending partners) that originate loans and share a portion of these loans with the investors on the Loanpad platform.

 

As an additional benefit, Loanpad’s lending partners fund at least 25% of every loan, which means they have ‘skin in the game’ and their interests are aligned with you, as an investor on the platform. Loanpad’s lending partners conduct a rigorous credit risk assessment before on-boarding any borrower, which is followed by another round of due diligence carried out by Loanpad itself, before accepting loans on the platform.

 

2. Two different risk classes

To minimise your risk of loss, Loanpad converts each loan into two different risk classes: a senior part offering lower risk and a junior part offering a higher risk/return. As an investor on the Loanpad platform, you’re only funding the lower risk, senior part of the loan, while Loanpad’s lending partners fund the junior piece – bearing substantially more of the credit risk. Therefore, should the loan default, these organisations stand to lose all their capital in that loan before you lose any.

 

3. Diversification

One of the most effective ways to minimise the impact of loss is to diversify your investment across a wide range of loans. To this end, Loanpad automatically spreads your investment across the entire performing loan portfolio on a daily basis. This means there is no difference between drip feeding funds or putting in a lump sum, as it all gets spread daily across all loans.

 

Should a loan default, what happens?   

 

Loans are managed by Loanpad’s lending partners under Loanpad’s supervision. If a loan is in default, Loanpad holds full “step-in” rights to ensure an optimal recovery strategy is agreed and pursued – in order to protect platform investors. Depending on the loan circumstances, this strategy may include:

 

• An LPA Receiver being appointed to take control of the security and seek a sale, refinance or other method of enforcement
• A sale of the entire loan to a third party
• The lending partner “buying out” the senior part of the loan and handling recovery themselves

 

You’ll continue to earn interest daily

 

Should a loan go into default, the investors on the Loanpad platform will continue to receive daily interest from Loanpad’s Interest Cover Fund (subject to available funds) until the loan has been recovered in full or a capital loss has been crystallised. The Loanpad Interest Cover Fund exists to ensure that investors get paid their interest daily, in full.

 

 

For more information on how we aim to keep your money safe, or to sign up for a Classic or Premium lending account, visit our website now.