I’ve talked to a lot of people now about property lending via peer-to-peer platforms. It still surprises me how people make their decisions to lend. When it comes to P2P lending, there are some simple questions everyone should know – how much will I earn? How much will it cost me? How long will my money be tied up for?
These are all valid, but there are some less obvious – but just as important – questions you should also be asking. If you’re thinking about lending via a property finance platform, here are five that could help you build a clearer understanding of exactly what you’re getting into.
1. Where does my money go?
The killer question. A platform should be able to tell you in very clear terms how they will use your money. This is easier if you’re lending to individual loans and have enough information, like credit reports and development proposals, to make your own decisions. It’s more difficult if you’re lending into a discretionary fund. Regardless of your choice, it’s good to know where your money is going and how it’s being used.
2. What type of lending do you specialise in?
Peer-to-peer lenders come in all shapes and sizes. At Invest & Fund, we only do residential development and bridging loans, but the other options include commercial finance, credit card debt, personal loans, buy-to-let. It’s a big market and it’s expanding all the time. The challenge if you’re not a specialist lender, is to find experts with the broad skills required to accurately assess a wide range of opportunities. Platforms offering a broad base of lending opportunities have to work much harder to deliver robust, thoroughly credit assessed deals.
3. What’s your process for finding and assessing profitable opportunities?
Credit assessments don’t have to be the black box of the industry. We want our lenders to clearly understand the people and processes behind our credit risk assessments. Potential lenders should have access to as much information as possible to make clear decisions – and we think every platform should do the same. Ask your platform about their credit assessment process. Request copies of credit papers, third party assessments and monitoring updates. Find out about the people supporting the process. A fancy job title is just that. Look for years of experience, people who have been through multiple cycles and have deep subject matter expertise. You are lending your own money.
4. What happens once I’ve lent?
For some lenders, facilitating the connection between lender and borrower is just about the end of their involvement. Your platform should be able to talk you through their monitoring process for all loans – how they assess progress, make sure projects are on track and still creditworthy, and how they report this information back to lenders. It’s our belief that platforms should be aligning their interests with those of their lenders through the entire lending process.
5. How do I get my money back?
If all goes well, this should be easy. If the project is in default, this could be painful. Ask your platform about the processes and people they have in place to work through a loan in default. Assume the worst and judge their answer from that position. Make sure you know where you, and your platform, stand in terms of security, guarantees and first charges against the borrower. As a point of interest, our fee structure reflects that we only get paid by lenders upon repayment of a loan.
Know what you’re getting
There’s no doubt peer-to-peer has the potential to generate returns for lenders, but you should always remember that lending places your capital at risk. The key is to know what you’re getting. These five questions should help.
Please remember lending places your capital at risk.
About the author: CEO David Turner co-founded Invest & Fund after a 30-year career as a trader in the City of London, working for various financial institutions including Tullett Prebon and RBS.