Decoding risk

October 6, 2018
180

Louis Schwartz, chief executive of Loanpad, explains what investors need to look out for when considering peer-to-peer lending…

 

WITH EVERY investment comes an element of risk, and peer-to-peer investing is no exception. But communicating this risk to investors can be a tough task. However, according to Louis Schwartz, chief executive of soon-to-launch P2P platform Loanpad, there are three key points to consider when talking to investors about risk.

 

“There are three main types of risk associated with P2P lending: platform risk, credit risk and liquidity risk,” he says. “Platform risk is essentially the risk of the platform itself going out of business, while credit risk is the chance of loans defaulting and losing money, and liquidity risk is how long it may take you to exit a platform if you decide you no longer want to invest there.”

 

Schwartz believes that these three risk concerns should be at the forefront of any investor’s mind, and Loanpad is committed to spreading this message among all of its existing and future customers.

 

“I think it’s important that investors look at all of those three areas,” says Schwartz. “And that they have a clear understanding of where they would sit in bad conditions as well as good conditions.”

 

So, how does Loanpad mitigate these three risk areas?

 

1. Platform Risk

 

Platform risk has been making headlines this year in the wake of the Collateral collapse. Investors now know that P2P platforms can fail, and they want to know what will happen to their money in this worst-case scenario.

 

Collateral’s situation was unique as the platform was not regulated by the Financial Conduct Authority, and Schwartz says that he doesn’t expect to see a similar situation within the P2P sector. However, he has put a number of checks and balances in place at Loanpad to further reassure investors.

 

2. Credit Risk

 

Loanpad has built a unique model to mitigate credit risk, which involves creating a senior and a junior loan structure where the lending partner retains a higher level of risk.

 

“This means that the security underpinning each and every loan on our platform is greater than can typically be invested in elsewhere,” Schwartz explains. “Furthermore, Loanpad’s investors are spread across every single loan in the portfolio every day, which has the effect of reducing the impact if any losses occur. So, essentially our lending structure reduces the likelihood of any losses and our daily diversification function reduces the impact of any losses even if they do occur.”

 

3. Liquidity Risk

 

“Every platform has different liquidity terms ranging from instant access to no access,” says Schwartz. “However, all platforms are essentially reliant on other lenders buying investors’ loans to provide the liquidity they may offer. So, to understand the true underlying liquidity on a platform it is imperative to consider the length of the underlying loans.”

 

Typically, P2P loans can range from one year to 10 years. Loanpad minimises the liquidity risk by focusing purely on short-term bridging and development finance loans.

 

“The longest loan on our platform is likely to be no longer than eighteen months, with the average term probably around twelve months,” says Schwartz.

 

These timeframes ensure that no one should be trapped in an investment for multiple years, thus improving the overall liquidity of the platform. And combined with Loanpad’s mitigation of credit and platform risk, Schwartz is confident that investors are kept well-informed and well protected.

 

Click here for more information about Loanpad.

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