Not all Peer-to-Peer (P2P) lenders are the same when it comes to risk and reward explains Roy Warren Head of Loan Portfolio & Risk.
After nearly six years of business, FOLK2FOLK still proudly reports that none of its Lenders have lost any money via the platform. This may be an unusual record for a Peer-to-Peer lender and one we’re determined to preserve. So, what’s our secret?
I’d love to tell you something clever; that our secret is an amazing algorithm, a marvellous mathematical equation, a fantastic financial formula but instead, the secret to our sound track record when it comes to our Lenders’ money is something very plain and simple. It is prudence.
Prudence is paramount.
All investments carry a degree of risk and all investors have a different risk tolerance and return appetite which is why Peer-to-Peer lending, with its broad array of lenders and vastly different models and approaches to risk, has grown to become a popular investment option for many.
However, comparison is not straightforward and propositions range from high risk/high return stakes to a more conservative end of the spectrum which is where FOLK2FOLK sits with our 6.5% p.a. interest rate and maximum 60% (LTV) loan to value ratio of forced sale value (this means how much could be obtained if the land/property asset was sold within 60 days and usually equates to c. 45% (OMV) open market valuation).
This is where prudence comes in. For us, prudence is about respecting our Lenders’ hard-earned money and ultimately leaving their investment decisions totally in their hands. We build strong relationships with our Borrowers and Lenders; understanding their requirements and preferences and take a common-sense approach to all things.
Lenders are the lifeblood of our business and we do all we can to protect their interests. This means we are not complacent about our assessment process and the quality of our loan book: we continually strive to improve our processes; stay ‘ahead of the wave’ by keeping abreast of sector issues, property values and the wider performance of the economy; and foster a risk culture of ‘no surprises’ by maintaining regular dialogue with Borrowers.
Our conservative approach to LTV (Loan to Value) has contributed to keeping our portfolio clear of Lender losses to date. However, LTV cannot be viewed in isolation, it’s also about serviceability and a sound exit plan for the loan. It is within our DNA that ‘good folk lend to good folk’ and the character and track record of our Borrowers is also important in our loan assessment.
We continue to improve the ways in which we monitor and control our portfolio. Our promise to our Lenders is that we’ll be open, transparent and not take our current track record of zero Lender losses for granted; prudence will remain paramount.
As with all investments, capital is at risk. Peer-to-Peer lending is not protected under the Financial Services Compensation Scheme. Our current track record of zero Lender loses relates to our past performance and is not a reliable indicator of future trends.
Roy Warren, Head of Loan Portfolio & Risk