The impact of Covid-19 on Peer-to-Peer
A little over a month ago, Loanpad HQ discussed a range of topics for upcoming blog posts including the upcoming IFISA season, importance of cybersecurity and loan due diligence. Fast-forward to today and our team are primarily working from home, stock markets have suffered losses unseen in decades and the world has united in its efforts to battle and defeat Covid-19.
Like many other businesses, we will do whatever we can to support the country so that we can all get through this together.
First and foremost, we join everyone in hoping that the best experts in the world manage to contain the fallout as best possible, slow the spread and ensure the availability of medical treatment for everyone. Our business has a strong ethical stance and we hope that at times like this we will see the very best traits of humanity come to the fore where we strive to help and care for all those around us who may need our help in many different ways.
The P2P market is by no means immune to the impact of Covid-19. Like other asset classes, the sector has seen an increase in withdrawals with many platforms effectively banning the ability of investors to access their money.
In these times, investors should realise that P2P firms vary significantly in risk appetite, structure and makeup of loanbook. Investors should do their homework on the various platforms and see what is on offer. Some of the questions you should consider include:
- What security is there? P2P platforms either make unsecured loans to businesses and individuals or loans secured against some form of tangible asset, like property. Unsecured loans by their very nature are higher risk as investors have no recourse if a loan goes into default. Loanpad only makes secured loans against property to ensure the property can be sold if necessary to recover your money.
- If security is taken, what are the loans to value? Even when security is taken, P2P platforms can decide how much to lend as a percentage of the security value. The higher the loan-to-value (LTV), the higher the risk as there is less of a cushion if valuations fall. Loanpad’s risk-averse business model only lends up to a maximum of 50% LTV with a current aggregate LTV of 28%.
- Are commitments made to future loans? P2P platforms often ‘commit’ to property development loans where the funds are only released during the course of the loan. Without having set aside these funds at the outset, they will often have to rely upon either continual repayments from other loans or more deposits. Given the structure of lending partners, Loanpad does not commit to lending any future money.
- What interest rates are offered? P2P platforms offer a wide range of interest rates linked to different account types and access times. The general rule of thumb is that the investors take on higher risk for higher return. Loanpad prides itself on lower-risk loans while still offering competitive rates.
We continue to believe that P2P has a firm place in investors’ portfolios. In recent days, the level of withdrawals at Loanpad has decreased to a trickle and we are seeing an upturn in deposits from both new and existing investors.
We do not see a material increase in risk of capital loss on any loans. Our loan structure is designed to outperform in tough market conditions. This is because our conservative appetite for risk (very low LTV property lending only) serves to shield our investors from falls in the property market which ‘may’ result from significant drops in the financial markets (as we are currently witnessing).
It is important to remember that the performance of loans on our platform is not directly correlated to the stock market and is in fact one of the advantages of using Loanpad.
We have always believed that most retail investors simply want to earn a fair return on their money that comfortably beats inflation in any foreseeable market conditions. That is what Loanpad aims to do and we fully expect to be able to do so even in these volatile times.
Written by the Loanpad team