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Which Is The Best Lending Works Account?

By Matthew Howard on 22nd December, 2017 | Read more by this author

Both of Lending Works' lending accounts receive the top rating and a highly favourable review from our experts.

But I'll tell you now that there's not an ocean's difference between them.

Still, if you're a keen lender, some small differences in repayment timing, interest rates and the risks might interest you enough to read on.

After explaining the differences, I'll tell you my preference for the best Lending Works* account.

Lending Works' choice of lending accounts

Lending Works' two accounts are a simple choice between lending in loans that last up to three years, currently paying 4% interest, or lending in loans lasting up to five years, currently paying 5.5%.

Lending Works 5-Year Lending Account  5/5 4thWay PLUS Rating Earn 5.5% per year
Lending Works 3-Year Lending Account 5/5 4thWay PLUS Rating Earn 4% per year
PLUS Ratings and interest rates correct at time of writing.

You also get IFISA versions of both those accounts. Some people have to pay tax on some of the interest they earn in regular lending accounts, but IFISAs are always tax free. (Read our IFISA guide to find out if the Lending Works IFISA version is better for you.)

If you want to lend for longer periods of time, Lending Works, like many peer-to-peer lending sites, has an auto-lend feature, which re-lends the loan repayments and interest that you receive from your borrowers.

If you want to lend for a shorter time, Lending Works has an early exit facility, but leaving early will depend on Lending Works being able to sell your loans to other lenders who want to buy. Usually this is not difficult, but at times it probably will be.

Both the three-year and five-year lending accounts are to the same sorts of prime borrowers and protect you with a substantial reserve fund to cover expected bad debts, as well as insurance that might repay you your money if borrowers are unable to pay due to becoming unemployed.

Yet there are differences between the accounts.

One of the key differences between these lending accounts

Looking at the three-year lending account first, clearly you can expect most of your money back within 36 months, plus interest. However, you don't wait three years to get most of your money back.

After just 12 months, especially due to early repayments from borrowers, around 60% of the loan amounts are generally repaid already.

With the five-year lending account, some payments will drag on for up to 60 months. After 12 months, you might have received one third to 50% of your money back.

Those figures are the typical results. How quickly you are repaid on your own Lending Works loans really depends on who your individual borrowers are, since some repay more quickly than others.

How that benefits the shorter-term lending account

If you want most of your money returned to you quickly, clearly the three-year account will achieve that faster.

It is also beneficial to go for loans that are repaid earlier if you want a stronger plan B, in case you are unable to sell your loans early before all your borrowers have repaid – if you need to get your money back before the three years are up.

Most of the time, it is easy to sell outstanding loans to other lenders. But sometimes it could be tricky, so having natural monthly repayments come in faster might appeal to you as an easier way to exit.

Finally, quicker repayments are useful if you are very worried that interest rates are going to rise rapidly and that you will be stuck earning lower rates on your existing fixed deals.

With each repayment you get, you can lend it out again at the new higher rates more quickly.

One of many great aspects about peer-to-peer lending as an investment is that the loan terms last just a few years. In contrast, traditional bonds (you probably have/had some bonds in your pension), typically last 10 to 30 years.

It can be frustrating when you are tied into lending your money at a fixed rate when newer borrowers then start agreeing to pay other lenders much higher rates. This causes chaos in bond markets from time to time.

But peer-to-peer lending has solved that problem with its shorter terms, and loans lasting just three years or less are naturally even better than five in this regard.

The benefits of the longer-term account

A clear benefit of Lending Works' five-year lending account is the higher interest rate of 5.5%, versus 4% in the shorter account.

But let me explain to you just how large a benefit this is.

The difference between 4% and 5.5% really builds up over the long term, if you are re-lending the repayments and interest you get back from borrowers:

  • £10,000 lent for 15 years at 4% will become £18,000.
  • At 5.5%, it becomes £22,300. That's over £4,000 more.

Higher interest rates also reduce the damage from bad debts.

In the case of Lending Works*, because it has a reserve fund, you will only truly feel the impact of bad debts if a lot more borrowers become unable to pay their bills, e.g. in a substantial recession.

At that point, Lending Works' reserve fund might be depleted and individual lenders will then have to take some losses. If you have been earning 5.5% up to that point, you have grown a larger cushion to protect yourself from losses.

Remember that losses in quality, prime individual loans are not like the stock market, where you lose 25% in a year very easily. Losses are much smaller than that. So earning 1.5 percentage points extra interest is useful.

All that said, I don't want to overstate the risk benefits of the five-year lending account over the three-year account, because both of them appear to pay ample interest for the risks involved. Since both have earned a 5/5 4thWay PLUS Rating, it means, in a very severe recession, we believe lenders can expect either no losses or that they will recover any losses after earning less than two years-worth of interest.

Slower repayments can also be a benefit

I described faster repayments as a potential benefit if you're considering the shorter-term lending account. There is a flip side: if you want to keep lending, and re-lending, your money, it can be useful not to have loans paid back to you so quickly.

Because sometimes it could take a little while to lend your money again after you have been paid some of it back.

Lending Works is usually quick to re-lend your monthly repayments and interest for you, but I have been told by a 4thWay user before that it once took him three weeks to lend some of his money. This doesn't add up to too much difference in terms of the interest earned, but it can bother some lenders if you expect rapid service all the time.

The best Lending Works lending account: my opinion

I think that the difference in speed of repayment between the three-year lending and five-year lending accounts is not large, making the benefits of the three-year account somewhat limited to most lenders.

On the other hand, the five-year lending account doesn't dramatically improve the already low risks.

So it really does come down to the simple matter of the interest earned. On this count, the five-year lending account is clearly substantially better and so I consider it to be the best Lending Works account.

Visit Lending Works*.

Compare Lending Works to the rest in the 4thWay comparison tables.

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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