Before you invest your hard-earned savings into a peer to peer lender, here are five key questions that you should be asking to give you the best chance of seeing returns on your money.
1. Is the lender regulated?
The Financial Conduct Authority (FCA) is the regulatory authority for 58,000 Financial Services firms and financial markets in the UK. The FCA has a rigid compliance system which regularly monitors companies’ actions in order to provide checks and balances to ensure that customers are safeguarded from unscrupulous or negligent activity. Third party regulated status does not mean the company is not reputable, but it does mean that it’s not subject to the same scrutiny as an organisation that is FCA regulated organisation in its own right.
2. Does the platform have a track record?
This might be deemed by some as a common-sense point, but it is pivotal to look into a lender’s history prior to committing capital. Regulated platforms are obliged to publish statistics on the performance of their Loan Books, including defaults and adjusted real returns. If it’s a fledging lender, then it would be sensible to look at the management team behind the project. Do they have a track record in property or finance or are they more tech savvy? You need to decide if you trust them with your funds.
3. Does the management team have the expertise relevant to their sector, or are they relying on an algorithm untested in a downturn?
Algorithms are undoubtedly a valuable tool to use when testing the viability of a business or consumer borrower. However, in order to produce reliable data, it should be stress-tested in prosperous as well as challenging times. It is important to ensure that the lender has a team that are experts in the sectors they work in and should also possess broader Financial Services experience so that only the safest propositions are offered to clients.
4. How easy is it to withdraw funds and what, if any, are the costs?
For many lenders, they will want to withdraw their funds at some point. They need to make sure that the platform they are investing through offers this service. From the outset you should find out what fees there are so that you are not caught out by hidden charges.
5. Are the loans secured on assets?
This is an area that is typically missed but is possibly the most important factor to consider. If loans are not secured on tangible assets that have been independently valued, there is little that the P2P lender can do to recover funds lent if the borrower defaults. All loans lent through the Relendex platform are secured on UK properties (almost all are First Charge mortgages). This means that we can look to realise the value of the asset security, should we need to, in order to mitigate any losses on a particular loan. Without this security, there would be less protection in the event that the borrower defaults.
