Julian Cork, Landbay COO, explores the 5 points you should consider before stepping into the peer-to-peer lending world as a lender.
When lending money in any guise you should always consider two questions:
1) Do you understand the level of risk that you are taking?
2) Are you being appropriately compensated for this risk?
This is no different within in Peer-to-Peer space, however the way you asses the answers to these two questions is different to conventional lending. This five part blog post series examines the key things that you need to look at.
One: The Borrower
Firstly, it is important that you understand exactly who you are lending to. This is both about understanding the fundamentals of their credit footprint and well as understanding why they are borrowing on the platform. What were their other options? Why aren’t they borrowing from conventional sources such as banks? It is also important to understand what they are borrowing for and ensuring that it is in their interest to repay the loan.
A good way think about this is to consider the Five Cs:
The first is Character: understanding the borrower, essentially his or her credit file. There are tools which help build this character portrait. At Landbay we use Equifax to look at the borrower’s credit history and Jumio to validate their identity. This enables us to complete KYC (Know Your Customer) checks. Knowing who you are lending to is very important as individuals in certain professions cannot afford to have a poor credit rating, so their incentive to repay is higher.
The second is Collateral: being clear about any assets underlying the loan and confident about the legal status of this security. Ask yourself if the platform’s terms and conditions articulate this and if the platform has the correct charges against the underlying security.
The third is Capacity: the borrower’s ability to repay. Ensure that you can understand information about the borrower’s income, or in in a property deal understand the sources of cash that will be used to finance the loan; do they solely rely on rental coverage? You need to understand how the peer-to-peer platform validates this so that you can verify capacity accordingly. At Landbay, borrowers need a minimum income of £30,000 alongside a 125% rental coverage. These criteria are externally checked using surveyors, market analytics and bank statements.
The fourth is Capital: does the borrower have skin in the game? In property this is all about understanding LTV (Loan to value). Landbay’s average LTV is currently: 63.1% and the maximum LTV in any single loan is 80%. Owner-occupied residential mortgages tend to have much higher LTVs. If you are financing someone’s car through a consumer peer-to-peer loan for example, make sure that they have a high proportion of capital in it so that they are not tempted to simply walk away.
The final point is Condition: taking into account the factors above, are the loan amounts and interest rates appropriate for the borrowers? If the interest rates accepted by the borrowers are alarmingly high, do you know why – and ask yourself what are you missing?
The information contained in this blog post should not be used by consumers to make financial decisions. Consumers have a range of different financial needs and requirements and as such should always seek independent professional financial advice before making an investment decision.