LendingCrowd On Track For A Top Rating

It's very early days still for LendingCrowd, but so far it's a tale of two halves:

• LendingCrowd's lower-risk loans are easily on track for the top 5/5 4thWay PLUS Rating.
• But its higher-risk loans do not currently appear to pay lenders enough interest to cover the risks during a severe recession.

Comparing LendingCrowd and Funding Circle

LendingCrowd* does unsecured business lending, rather like the large and established P2P lending site Funding Circle.

Both of these P2P sites give their borrowers a “borrower grade”.

A+ is the best grade meaning each P2P lending site believes these are the borrowers who are most likely to be able to repay their debts:

• LendingCrowd has grades A+, A, B+, B and C+.
• Funding Circle has grades A+, A, B, C, D and E.

Now, an A+ at one P2P lending site can actually be the same as a C at another. In other cases, P2P sites are so poor at grading borrowers correctly that their grading systems are worthless.

This is why we have 4thWay PLUS Ratings, so that we can better compare both the interest rates and the risks of losing money to bad debts.

LendingCrowd's top borrower grades

We'll come to LendingCrowd's riskier borrower grades later.

Firstly, in this table, I have combined LendingCrowd's top three borrower grades of A+, A and B, because there are too few loans to sensibly look at each grade individually:

Feature	LendingCrowd grades A+, A & B+	Funding Circle A+ grade	Funding circle A grade
PLUS Rating
Interest Rates	8.3%	5.3%	6.8%

The above Funding Circle PLUS Ratings could improve over the coming months, because that P2P site has stopped approving higher-risk property development loans.

Why LendingCrowd's provisional PLUS Rating beats Funding Circle

LendingCrowd still has to wait before it can earn a PLUS Rating and it has to complete many hundreds more loans before we remove any penalties for having a short history.

However, as you can see from the table above, its current trajectory could earn it a 5/5 PLUS Rating within a few years.

We'll come to the risks in a second, but the chief reason LendingCrowd's combined A+, A and B grades are currently on course for a higher PLUS Rating than Funding Circle is because you earn substantially higher interest rates.

At 8.4% interest after lending fees but before bad debts, the extra interest protects you better against losses than Funding Circle's 5.3% to 6.8%.

Risk of bad debts are evenly balanced between them

Of course it's not all about interest rates and indeed, the other side of the coin – the risk of borrowers being unable to repay their debts – is a much more important factor than interest rates.

Since protecting against losses is the most important thing an investor can do, the PLUS Ratings look deeply into this flipside.

In a severe recession or property crash worse than the 2008 financial crisis, LendingCrowd's A+, A and B loans combined show an estimated total loss of around 10% before interest, which is very similar to Funding Circle's A-grade. Funding Circle's A+ grade does better at a loss closer to 7%.

At present, just three loans in 100 are either late or have gone bad, which is also comparable to Funding Circle's A grade.

The bottom line is that, according to our stress tests, those lending through LendingCrowd across those borrower grades should expect to recover their losses in a recession within two years, if they make a loss at all.

Funding Circle lenders can also expect to make a good and timely recovery, although according to our models it could take up to three years at the A+ grade and four years at the A grade.

LendingCrowd's higher-risk borrower grades

Now we turn to LendingCrowd's B and C+ loans: its higher-risk borrower grades.

Bearing in mind there are not even 40 loans combined at these two borrower grades, we're going to need far more loans before we'll really know how the risk and reward for these loans will shape up. Because at present its unattractive results could just be bad luck.

Currently, around 14% of these loans are either late or have gone bad, which is more than Funding Circle's D or E grade loans.

Stress tests currently put LendingCrowd's B and C+ grade losses in a severe recession at a potential 35%, which is extreme stock-market level risks and not the risks you usually associate with lending.

Interest rates on these loans are just 10%. Therefore, according to our models, a lender who lends at the start of a big recession and doesn't re-lend can expect to make an overall loss by the time all their loans are repaid or written off.

If LendingCrowd's record or interest rates here don't improve, these higher-risk borrower grades will therefore not be awarded a 4thWay PLUS Rating.

LendingCrowd needs more time

LendingCrowd has approved three lower-risk borrowers (A+, A and B+) for each higher risk one (B and C+).

If we were to do a provisional 4thWay PLUS Rating on all LendingCrowd borrower grades together, it would earn a great 4/5 rating.

Yet specifically at the A+, A and B grades, LendingCrowd's high interest rates and lower apparent risks make it an interesting additional option if you're looking to diversify some of your lending away from Funding Circle.

You can, if you want, choose loans at LendingCrowd yourself, so you could select just the higher grades.

LendingCrowd's loans are available in an IFISA (see sidebox).

Until just a few hours ago, you couldn't select your own loans in the IFISA. However, LendingCrowd has just launched another IFISA where you can do so.

LendingCrowd is still new with little more than 130 loans, so it needs much more history to truly prove itself like Funding Circle already has.

Read the LendingCrowd Quick Expert Review.

Read more on Funding Circle's bad debts in My “A+” Funding Circle Loans Are All Going Bad.

Visit LendingCrowd*.