What Lending Works Has Got Wrong
Lending Works has said to us that lenders have expressed support of it during the pandemic. And we have corroborating evidence that it's probably a minority of lenders who are truly angry. Yet there's certainly some anger going around.
While it has so far justified its 4thWay PLUS Ratings, in some areas, Lending Works has mis-stepped and some lenders' beefs are probably reasonable.
Lending Works* is comparatively transparent. It provides sufficient information for you to make a decision whether to lend or not. It also answers 4thWay's questions and provides us with access to its key people. It gives us a lot of additional information and data – more than enough for us to conduct our ratings calculations.
But, like almost all P2P lending companies, it's got places where it can do better. This is particularly the case in communicating with lenders and prospective lenders. As you'll see in the following breakdown of what Lending Works has got wrong:
Explaining “liquidity”
This is one area where many P2P lending companies have gone wrong by not declaring clearly enough and often enough, and in a variety of ways, how lenders' money might get tied in for longer, even when they have early-exit options.
It's the other side to getting more stable returns than the stock market. You might not lose money overall, but you also can't sell at a discount to get out of your investments more quickly.
We at 4thWay have tried as best we can to bridge the gap in understanding that money lending is supposed to last until borrowers repay. We've tried to explain that the option to sell loans early, before the natural repayment event, won't always be available. We've put a great deal of emphasis on this since our founding days.
Indeed, we've written in our guides since 2014 that lenders should expect to have their money tied in sometimes. Not that they “might” do, but that they should actually expect it to happen. So a case of “when”, not “if”. We have even often mentioned hypothetical downturns as a prime time for such liquidity problems. It's part and parcel of this investment. It's all part of stable, good money lending.
Lending Works – and many other P2P companies – really could have done an awful lot better in this regard. Lenders shouldn't have to have this lesson hammered home by a pandemic, but hammered home by lots of attempts to explain it in advance.
Explaining advertised target lending rates
Some lenders have probably been surprised that Lending Works is paying less than the advertised rate during the pandemic. Their returns are being impacted by bad debts, which are being paid for with temporary negative interest rates.
I think that Lending Works could have done more to emphasise what their advertised target lending rates mean. To start with, more emphasis on the word “target”. This includes more frequent, clear explanations of how the target might not be met, the extent of possible undershoots and how the undershoot will be paid for. And I don't mean in boring legal disclaimers, but in easy to read text.
(I do have some sympathy for Lending Works here. We at 4thWay also find it extremely difficult to get as many 4thWay users as possible to understand precisely what the 4thWay PLUS Ratings mean, and what they don't mean. The fact is that there's a lot to explain and a lot to highlight in investing. It's not always easy to explain every relevant detail at every relevant juncture. But we try to improve over time…)
The timing of the pandemic for Lending Works was unfortunate, since it came off the back of an earlier reduction in rates for many existing lenders on their outstanding loans (but not their new loans). This was because Lending Works had somewhat miscalculated the extent of bad debts that would occur in ordinary times. It learned from its historical results and adjusted for that miscalculation. We have every reason to believe its target rates will be on track in future – but then the pandemic hit.
This undoubtedly irritated some long-term Lending Works lenders, who probably thought they had moved beyond interest-rate reductions. It certainly didn't help that it went beyond reduced lending rates and on down to temporary negative rates…
Explaining negative lending rates, overall returns and investing horizons
I think that Lending Works might not have explained negative lending rates so that as many lenders as possible could understand it. I don't recall Lending Works even using the phrase “negative lending rates” until after it introduced them when the pandemic started. So lenders were unprepared for it. It was a shock to them.
Lending Works probably needed to better explain to lenders from the start that negative rates don't mean any lenders have lost money overall, but that the profits they have made on some of their loans are contracting. (More on that here.) It's much like if you invest £5,000 on the stock market, see it rise to £6,000 one year and then it falls to £5,500 the next. You're still in profit on your investments overall, even if you've had a disappointing calendar year.
Higher pandemic bad debts reveal themselves in Lending Works through negative lending rates. If you compare this to various property P2P lending companies, bad debts are revealing themselves there in borrowers not being able to repay on time. Property P2P lending platforms are therefore having to work with the borrowers to get them on track again, or they are taking long-winded legal action to sell the properties and recover the bad debts.
I think the way property lending companies deal with downturn bad debts is slightly easier to understand. In addition, since Lending Works pays lower lending rates to begin with compared to many property P2P lending accounts, the loss of interest feels bigger to lenders. The sorts of loans Lending Works arranges have also been impacted quite hard in this particular downturn. Lending Works also more swiftly confirms debts as having turned bad than most property P2P lending companies, which puts more emphasis on its bad debts earlier on in the aftermath of the pandemic lockdowns.
Lending Works could perhaps point out that many stock-market investors will be sitting on an overall loss on some or all of their investments in 2020. E.g. they invested £5,000 in the stock market, it rose some, but then their investments fell to under £5,000. But that is not the case for any of those lending through Lending Works.
Information on individual results
Lending Works has occasionally provided some ad-hoc information and figures to 4thWay showing the spread in individual results between its lenders, but it doesn't give much in the way of solid data.
I may have missed something, but, as far as I have seen, it also hasn't provided any details on the variability of lending results directly to the public at large through its website.
If it has provided any such information and I've overlooked it, it can't have given it much quality space on its website. I know this, because 4thWay scrapes data both manually and automatically from P2P lending companies' websites on a monthly basis. We do this partly to see what they're telling the public. We also do it to compare differences in what they're telling the public to the data and information provided directly to 4thWay.
Lending Works does at least mention average actual results versus the targeted results. But, as a former colleague of mine used to say: ‘”On average I feel just right”, said the man with his head in the oven and his feet in a bucket of ice.'
In fairness, most P2P lending companies could provide more information on the spread of results achieved by their lenders who have adopted sensible lending strategies. But that's not an excuse.
For the latest on variable results, read: Has Anyone Lost Money At Lending Works And How Variable Are Lending Results?
Information on the reserve fund
Lending Works could provide more information about its reserve fund. Lending Works does publicly explain how it's funded and how much is in the fund overall, which is certainly the most important aspect.
However, its reserve fund is effectively multiple reserve funds, with loans issued in a calendar year being batched into each reserve fund, which is isolated from the rest of the loans and the other reserve funds.
While Lending Works leaves the possibility open for some cross-subsidising, it should provide more information on each annual cohort of loans and the reserve-fund protection available to each cohort. This would enable analysts, lenders and prospective lenders to better assess where the reserve funds stand and how they have performed.
The fact Lending Works has a reserve fund probably contributes to the overall confusion on negative lending rates and lower returns. Because some lenders probably thought the reserve fund was basically the entire defence against losses, even in downturns. Yet it was actually a smaller part of the defence compared with the interest lenders earn, which offsets risks.
It's the results that matter
None of the above is sufficient reason to take Lending Works* off your list of quality P2P lending providers. It still offers diversification that might well have its turn outperforming other types of lending in the next recession. It's on track to get through this one with all lenders in the plus on their investments by the time they are fully repaid. And prospects for lenders starting in 2021 are very good.
4thWay PLUS Rating Update On Lending Works.
Has Anyone Lost Money At Lending Works And How Variable Are Lending Results?
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The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
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