3 Ways NOT To Choose P2P Lending Sites

There are a lot of ways to look at a P2P lending site to get a handle on the risks. Here are three ways that can lead to false positives.

1. The P2P lending site has won awards

Almost since P2P lending started, P2P lending sites have been offered awards, e.g. attractive online badges saying “Best P2P Provider”.

The first problem is that these are being awarded by several businesses and publications that simply do not have the skills to understand the risks.

There are also a number of awards that have no value to individual lenders like you and me, but might seem misleadingingly impressive. I'm talking about awards such as “Fastest Growing P2P Lender”.

This doesn't help us understand anything about whether it's a good investment, although it might make the 4thWay team look into whether the P2P site has started approving borrowers willy-nilly in order to expand rapidly.

Also, awards are primarily a marketing stunt. Businesses that offer awards hope that the popular P2P lending sites that receive them will share the award on facebook, twitter and on their own websites, thereby giving the awarding business some cheap marketing.

Awards are also a way to sweeten the relationship for P2P lending websites that have commercial relationships with the awarders.

(By contrast, at 4thWay, our PLUS Ratings go to P2P lending sites that provide us with enough reliable data and pass our standardised, strict international banking tests.)

2. Membership of associations

The primary purpose of any public-facing business associations is PR – public relations. They are an extension of the marketing departments of all its members. In some cases, such as the British Bankers's Association, it can deteriorate so far that it becomes nothing more than a propaganda machine – a mouthpiece.

Statements made by an association are closely watched by its members, which will require that it avoids any controversial issues that would tear the mouthpiece apart. So if a number of its members have something they don't want to come out, it can become a race to the bottom in terms of openness and transparency.

The P2P Finance Association started very strongly, as I'm sure many well-intentioned associations do. But it is not likely to remain so sparkling clean over time. RateSetter had to dismiss itself from the association recently after breaking one of the P2PFA's rules and Wellesley, which we last covered in Wellesley Is Still A Sell, also walked away.

On average, I would expect P2P lending websites in the P2P Finance Association right now to be safe, but I think it absolutely won't always be the case that all members are low risk.

3. Cashback!

Did that exclamation mark give you a small jolt of excitement? You're not alone.

The allure of cashback on people exceeds its value. That's why so many businesses offer it. It simply works at getting more people to buy or invest.

Yet cashback is rarely a good reason for you to add it to your list of chosen P2P lending sites. It might be a nice bonus, but that must be on top of an already good deal that you would have chosen to take anyway.

Take the latest cashback offer to hit my inbox: Lending Works'* pays cashback if you move your money into its IFISA from another ISA of yours. You can get £50 to £500 in cashback depending on how much you transfer. The £500 in particular sounds attractive, but it's for a minimum transfer of £50,000.

It works out at around 0.5% interest over two years, at best.

I think Lending Works is among the most attractive P2P lending opportunities around, with very low bad debts, excellent protections for lenders and good interest rates for the risks involved. Those are good reasons to use it. But P2P sites might sometimes give a cheap cashback incentive instead of offering a good, basic risk-reward balance.

…After writing the above, another cashback offer arrived. This one from LendingCrowd*, which does loans to small businesses. It will pay £200 if you lend £5,000 (or an additional £5k if you're an existing account holder). This one is more attractive and more generous than usual, as it could mean as much as roughly 2% over two years.

Yet, in some ways, attractive cashback can be more dangerous, as it is more likely to make you rush a decision without looking at the underlying risks.

Get a better handle on the underlying risks:

Read the LendingCrowd Quick Expert Review.

Read the Lending Works Quick Expert Review.

Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.

We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.

The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from LendingCrowd and Lending Works and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.