Peer to Peer Lending: How to mitigate/mollify risks

Being a relatively new form of investing, many savers are understandably a bit nervous of putting money into a Peer to Peer Lending scheme. What if it all goes wrong, they ask themselves.

And why shouldn’t they? Traditional banks and building societies haven’t exactly shown themselves in good light in recent years; remember 2008 and the near collapse of all those big high street banking and lending names? HBOS, Royal Bank of Scotland, Bradford & Bingley, Alliance & Leicester – they all had to be rescued by the government.

 

Safeguards with online lending platforms

So, it’s no surprise people are nervous about newer, online forms of investment. However, rest-assured safeguards are in place. All legitimate Peer to Peer Lending platforms have to be regulated by the Financial Conduct Authority (FCA), for instance. What this means is that the platform operates according to strict regulations, especially when it comes to the protection and treatment of client money. It also ensures that each loan opportunity is legal and transparent.

Unlike the banks though, online lending platforms aren’t part of the Financial Services Compensation Scheme (FSCS). As a result, and in order to allay saver’s concerns, many platforms have developed their own ‘bad debt provision scheme’ by ring-fencing an investor’s fund. This would only be used in the event of a deal defaulting, and the money distributed according to the original amount invested.

 

Asset-backed security at Sourced

Here at Sourced, we also have further security for our investors in the sense that we are an asset-based platform. This means that should a deal go wrong; we have the property to sell to ensure our savers are compensated. They would have first legal charge to the money i.e. they would be paid first from the sale of the assets. This isn’t dissimilar to a bank selling off a property after a mortgage payer defaults over a long period.

Other forms of security we can offer here on the Sourced Peer to Peer Lending platform is a Personal Guarantee. This is a legal document the directors have signed, which promises to pay back loans if a borrower defaults. In a way it is a further safety net for the investor. Further benefits are that we only deal in 70% loan to value. The value of the asset security would have to fall by at least 30% below its valuation before capital was at risk.

Another unique form of security we have at Sourced is that the borrowers must be a part of the Sourced Network, meaning they have gone through rigorous training and have ongoing support from Sourced HQ. As we know all our borrowers, we understand what level of developer they are and will only let them go forward on certain projects that suit their level of property development experience.

 

What you have to do prior to investing

So, what should you do before investing in a particular Peer to Peer Lending scheme platform? Well, due diligence is essential. This means thoroughly checking out the platform, who is behind it and how it works. You’ll also want to know what current and past investors feel about it.

When it comes to choosing what to invest in, we would always recommend that you spread your investment over more than one project. It’s yet another way to safeguard your money – so why wouldn’t you?!

 

For more information, get in touch with Sourced Capital – capital@sourced.co