I Don’t Know How Many Times We Have To Tell Lenders This!

Occasionally lenders reach out to 4thWay and describe what they are up to, how they're doing and what their experiences have been when lending. I really appreciate the contact from you!

Recently I had an email that inspired me to write this page today.

I'm not sure what more we can do to explain to lenders that the flip side of investments that are – mostly, and on the whole – much more stable than the stock market is that your money is likely to get tied in at times. Sometimes, you won't be able to sell early and you'll have to sit it out for months or years.

That is still the case, even if you're lending exclusively through the best online lending accounts.

How good those P2P lending providers are at assessing loans and providing you with positive returns doesn't prevent the fact that sometimes you can't exit early. Indeed, your exit on many loans will sometimes be delayed beyond the loans' initially agreed end dates.

Often the cause of delay is because no other lenders are currently looking to buy loans when you want to sell. Another cause can be that the types of borrowers you are lending to are going through a bad period that causes many more of them to suffer delays in their ability to repay.

When investing, either you have more stable performance (the plus side) and illiquidity (the downside of being tied in), or you have volatile performance (possible big upside and possible big downside with lots of fluctuations in between) and near-guaranteed liquidity (pure upside).

Online lending has stably produced profits every month. Yet, on the flip side, pretty much every year, lenders using one P2P lending account or another have found that they're not able to sell out early on many of their loans and have to wait it out.

The most obvious counter example to P2P lending is the stock market. You can almost always sell your shares whenever you want, but you might have to do so at a 30% discount.

The point is that, when money lending, the natural holding period – the natural “investment horizon” – is from the date the loan is issued until the day the borrower pays it off. Whenever that may be.

While you can often fight against the waves of nature – in this case by selling to other lenders early – often the tide is simply too strong and you have to be prepared to go with the flow.

You have to be prepared to hold on to your loans even if the lending account tries to offer easy access.

The illiquidity here is a blessing in disguise for many people, as it imposes discipline on you. When you could easily sell even during a storm then you're more likely to panic and sell for a huge price-cut, just as many people do when buying and selling shares.

(That doesn't mean you can't make similar mistakes that cost you. For example, sometimes you're able to sell when you're panicking, so you panic-sell all your good loans and stop earning interest on them, leaving yourself just with the bad ones that might give you an overall loss. So you still need to learn well what you're doing and only put your money in when you feel really confident even during bad times, to prevent your emotions getting the better of you.)

That doesn't mean that you can't have a rough patch in terms of performance with individual P2P loans. And it doesn't mean that one of the many P2P lending companies that you lend through (because I really hope you are lending through many) can't also disappoint you. But the stability of the wider market across a sensibly built portfolio is huge. And that is partly thanks to the illiquidity!

Your money can get tied up and some of it almost certainly will if you routinely lend your money. End of story.

To find out how you might increase your chances of getting your money back sooner, read 10 Ways To Get Your P2P Lending Money Back!

Another old chestnut

Since I've still got your attention and I'm on the subject of what lenders don't realise until after it happens, I'm going to bring up another old chestnut.

There are so many I could choose from, but to finish today I just want to touch on “concentration risk”. This means that you've bought too few eggs or spread them across too few baskets.

This is another one that it doesn't seem to matter how much 4thWay tells you about it, we still find a lot of lenders just use one or two P2P lending accounts and/or buy just a handful of loans. If you do this, you're creating substantial risks of losing money.

When we take 4thWay's most diabolical forecasts – where we assume catastrophic economic conditions and what might happen to lending results at those times – we see that, collectively, 4thWay PLUS-Rated accounts still have a comfortable barrier from suffering losses from bad debts, if you've committed to lend and re-lend for at least two years.

However, the point is that this only works if you're not highly concentrated. For example, based on those worst-case scenarios, you would have around an 11% chance of making an overall loss if you just lent in 10 property loans through one 4thWay-rated lending account.

That means that more than 1-in-10 people choosing to take that high level of concentration risk could lose money. (Indeed, more than 1-in-10 would lose money, because several of those people would compound this error with other mistakes. Most typically, that would be by selling all their good loans early, thus earning no more interest to offset losses.)

Compare that with lending across at least six 4thWay PLUS-rated lending accounts and spreading fairly evenly across 200 property loans.

If you do that instead, the risk of suffering an overall loss across your full basket of holdings plummets to considerably less than 1%. (More loans are needed for your non-property lending.) That's even though you might have one lending account or another that by itself has a losing patch that time round.

Again, this is provided you don't panic sell your good loans and you commit to re-lending through the bad times.

I get the feeling that investors sometimes feel guilty, as if they feel they're bad investors, when their results with one lending account aren't as good as they expected at the particular time. Wrong. Don't let a single bad patch at one lending account put you off it, sell your loans – only to end up too concentrated in too few lending accounts or too few loans.

Further reading

There Are Only Two Good Reasons To Borrow Money.

4thWay’s 10 P2P Investing Principles.

Pages linked to above

4thWay P2P And Direct Lending Index: March 2025.

10 Ways To Get Your P2P Lending Money Back!