Lending Works’ Bad-Debt Provision Fund Got Better

Sorry that we missed this somehow, especially since I’m a Lending Works member: its bad-debt provision fund has got better from 1 January.

The worst bit is that I was sort of told this by someone working there in December.

Anyway…

Here’s the situation: Lending Works now spreads your risks across all outstanding loans. This is the same system used by RateSetter and Wellesley, two of the other P2P lending companies aiming to be the safest.

If it looks like Lending Works’ provision fund is going to be overwhelmed, the trustees running it can call for all outstanding loans to be pooled together. This means that all individual lenders like you and me are effectively sharing the pot.

So, instead of lending to just 50 or 100 borrowers, you’ll effectively be lending to over 1,000 by the end of 2015. So if bad debts get huge, overwhelming the large provision fund and Lending Works’ other considerable safety features, any remaining losses will be spread between all lenders.

This means that you can’t lose out badly if you have serious bad luck with your own borrowers. All lenders lose equally and so no one should lose heavily.

Who this applies to

This applies to any money you lend after 1 January 2015. It can also apply to earlier loans if, when the time come, you ask to join in.

Let’s not become overly safe

Lending Works has told me that it is planning to decrease the size of its pot over time, as it considers it unnecessary. I think it probably is too. Although it'll be a shame to see it dwindle, it will be harder to maintain as Lending Works gets larger. Also, if Lending Works becomes too obviously safe then everyone will want to lend through it. That will push down lending rates, because more lenders will accept lower rates just to take part.

With Lending Works, as with other safer P2P lending companies, I think it would require a seriously dreadful event before you lost money. Provided they keep up their high standards that is, but we’ll keep an eye out for when any of them don’t.

Correction to this article on 8 January 2015: Originally, I wrote that business lenders (such as banks and other financial institutions) were not allowed to claim on Lending Works' bad-debt provision fund. However, this is incorrect. I have deleted the offending paragraphs.

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