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Lending Works Review

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By on 28 January, 2021 | Read more by this author

Below is the latest Lending Works review given by one of 4thWay's specialists.

Lending Works Logo, used in 4thWay's Lending Works review4thWay's Quick Expert Lending Works Review

A good risk-reward balance in ordinary times, but shocks are shaking confidence of existing lenders

Lending Works review: their best-rated product

Lending Works review: Exceptional 3 PLUS Rating for Growth Account

Lending Works' Growth Account received an Exceptional 3/3 4thWay PLUS rating

This account is currently paying 4.5% interest for new lenders lending in 2021.

Note that existing lenders can currently expect to earn less and that some existing lenders will find this top rating to be controversial. It's important that you understand what the 4thWay PLUS Ratings mean.

When did Lending Works start?

Lending Works started in early 2014 and has completed £220 million in personal loans. It temporarily closed to new lending due to the pandemic, but it has re-opened again at the beginning of 2021.

What interesting or unique points does Lending Works have?

Lending Works* has strong defences against losses and no lender has permanently lost money overall after all their outstanding loans have been repaid.

Your risks are effectively spread across thousands of borrowers, since risk is pooled across a very large number of loans. Therefore, you cannot be the victim of extreme bad luck in the basket of loans that you're lending in.

It has a liquidity fund, called Shield, to cover expected losses, being 13.96% of the size of the outstanding loans. That's made up of £921,733 cash in the pot and £10,221,858 due to be paid in as loan repayments come in. The workings of the Shield are complicated, however, as pooled lending in the Shield is segregated by the year in which lending was conducted. Lending Works doesn't provide enough data an ongoing basis to get a clear picture of how this is working in practice for lenders.

Negative lending rates

Some existing lenders who lent money in 2020 or earlier have probably been shocked recently by Lending Works not just reducing lending rates, but making them negative, in order to put more money into Lending Works' liquidity fund. This means that existing lenders are directly taking some of the hit for bad debts on their loans, caused during the pandemic lockdown. The extra interest diverted to the liquidity fund goes towards protecting existing lenders in those loans, not towards supporting lenders who lend in new loans in future.

Lending Works has said that, by the time the loans are repaid, it expects all lenders to have recovered those losses from new interest paid on the outstanding loans that are in good standing. However, conflicting reports from some individual lenders state that rates will remain negative until the loans are fully repaid, and that therefore negative rates are not temporary. We are in the process of seeking supporting evidence for those allegations and specifically looking to establish whether this means any individual lenders will lose money due to pandemic losses.

That said, while we don't get full numbers breaking down lender performance, I am sure that a minority of lenders will be disappointed with their overall returns so far since they started lending. I have a fundamentally relaxed view to temporary losses at individual P2P lending companies, while other lenders will be angry about negative interest rates. Neither view is right or wrong, just personal. But, regardless of a lender's viewpoint, Lending Works needs to do better at explaining what its target lending rates mean, especially during an extremely harsh economy.

Lending Works is so far completely opaque about data showing how the negative rates for existing lenders are being applied to individual lenders. For example, we don't know if lenders who started lending just before the pandemic are also having substantial negative rates applied. Since they've had little time to earn positive rates, it means they could even be currently sitting on effective losses from existing loans, whether they prove to be temporary.

I would note that some individual lenders believe that Lending Works should even be calling negative rates “lending losses” – even if they turn out to be temporary by the time the loans are fully repaid. The definition is even more complicated where some loans have received repayments and money has been re-lent again. Typically in money lending, losses are not confirmed until the final result for each individual loan is known or at least until it can be reasonably predicted, which is often after all recovery attempts are finished and every penny of interest from the borrower can be earned.

An example adjustment for existing lenders

With a deficit of information from Lending Works about how various existing lenders are impacted by pandemic adjustments, I'll just give you an example from one 4thWay reader. He said that this month he had 2.908% removed from his account this month to divert to Lending Works' liquidity fund, while his wife had 3.429% removed. He asked rhetorically: “Is this a variable negative interest rate or retrospective action?” You decide.

More on Lending Works during COVID-19

For most of last year, Lending Works approved no new loans. As of 5th January 2021, it has started to approve new loans again with stricter criteria, and therefore new lending is re-opened.

Regarding existing lending, Lending Works* isn't providing data to us quite as regularly as we would like in order to stay on top of its overall performance – but the irregularity only leaves us a few months behind, so it is still sufficient.

We can see that up to October 2020 it was performing within our expectations for such a dreadful pandemic year and now in 2021 it's therefore looking likely to weather the downturn. We still expect lenders to make money overall by the time loans are repaid, although note my comment earlier about allegations we're looking into, as well as the fact some individual lenders are not feeling satisfied right now.

A significant factor is that lenders with existing loans cannot sell them early at present and have not been able to through the pandemic. This risk in P2P lending is something that we have regularly covered at 4thWay and we do not find it to be unexpected, particularly during a very rough economy. But we know that it has taken some individual lenders by surprise. Lending Works needs to do better to explain this risk in advance of it occurring.

The alternative to preventing lenders from exiting early in times like these is to allow lenders to exit for a loss by selling their loans for less than they are worth. This would however mean that more lenders will get an overall loss, and indeed steeper losses, during downturns if P2P lending companies allow this to happen.

This year, Lending Works said: “We have resumed lending tentatively and in a risk-averse manner. We initially expect the matching times [i.e. the time it takes for your money to get lent out] to be significantly longer than pre-crisis, but at the moment we [are] not exactly sure how long they will be. By this summer, though, we expect the lending queue to return consistently to pre-crisis levels.”

How good are its loans?

Lending Works' personal lending has been as profitable to individual lenders as it has been to modern banks, with a profit after bad debts being steadily around 4% per year, on average, by the time the loans are repaid.

Note that while no individual lenders have experienced an overall loss after all their loans have been repaid naturally by borrowers, returns have varied. Some unlucky lenders have therefore received a few percentage points less.

Lenders who lent in loans approved in 2020 can currently, on average, expect to earn more like 2.5% to 3.5% per year. Those lending in loans issued in 2021 can expect to earn more again. (More on variable results later.)

Lending Works is no longer a small peer-to-peer lending site, as it has approved over 30,000 loans as of 2021. As it has grown, its borrower mix has included some borrowers further up the risk scale, as expected, and accordingly increased payments to its liquidity fund. (It's sensibly, temporarily reversed course on that during the pandemic, and especially from 2021, to lend to higher-quality borrowers.)

Lending Works* has so far proven adept at selecting borrowers. In recent years it has considerably improved its setting of borrower interest rates. Borrower rates have been increased, and not just for the highest-risk borrowers. These higher rates are used to pay more to Shield.

How much experience do Lending Works' key people have?

Lending Works* has plenty of in-house experience related to approving loans and setting the policy for doing so. It also recently hired a senior credit-risk specialist from one of the high-street banks. Her highly relevant experience in personal loans is probably what has driven the improvements in Lending Works' processes, forecasting methodology and interest rates.

Back in 2018, Lending Works brought its bad-debt collections processes in-house. While it still outsources bad debts after two months of late payments, I hope this more hands-on approach will improve its somewhat weak record in recovering bad debt. That said, lower recoveries are being counterbalanced by its liquidity fund and strong measures to spread the risks.

Lending Works review: lending processes

Lending Works* conducts all of the standard borrower checks that should be carried out for personal loans. I'm glad to see that it uses one of the more reliable credit-reference agencies, despite the higher costs. Indeed, it now does dual checks using more than one agency, which is the best approach.

It appears to set high standards. Borrowers' average income is high at £43,000, most borrowers are homeowners and they are generally over 25 but younger than 49. The level of bad debts has been very consistent for three years, which demonstrates it understands its borrowers and correctly assesses them prior to making a decision on whether to lend.

Four in ten borrowers are consolidating debt, which is not so good compared to borrowing for a car or home improvements, but it's pretty standard and within expectations.

Borrower insurance

We had a recent question from a Lending Works lender: what happened to the insurance that can sometimes pay out when borrowers have difficulties? Lending Works discontinued this insurance some years ago.

How good are Lending Works' interest rates, bad debts and margin of safety?

It's a close call, but its interest rates on its Growth Account are high enough and the liquidity fund big enough to protect new lenders from heavy overall losses during a severe recession that is similar to the one we experienced in 2008, by the time the loans are fully repaid by the borrowers. That's based on 4thWay's international Basel stress tests.

Lenders who lend and re-lend patiently through a downturn and out the other end further improve their chances of coming out with positive results.

We think lenders using the Flexible Account should be prepared to experience small overall losses in a severe downturn similar to 2008 by the time all their loans from the period are repaid, although not in smaller downturns.

Has Lending Works provided enough information to assess the risks?

Lending Works* has been transparent with us on many points, providing a lot of data, access to its people, and answers to 4thWay's questions. It has enabled us to analyse each individual loan's performance using many risk modelling and investing techniques.

For individual lenders, it provides a lot of clear information and statistics on its website.

However, Lending Works is disappointing in that it rarely provides any information that enables us or lenders to see the variability in returns. While all lenders have positive returns, it would be useful to know how many of their number earn an overall rate that ends up being considerably lower than the average rates that Lending Works focuses on.

(Correction: this following paragraph from me makes little sense, since lenders haven't been allowed to sell!) Expanding on that point, the fact that the number of lenders didn't dip much during the pandemic and that Lending Works expects slower lending times for a while in 2021 both indicate that few existing lenders are desperately trying to sell their loans to other lenders. But circumstantial evidence doesn't replace hard figures.

Is Lending Works profitable?

Lending Works still isn't profitable, as it remains in its rapid growth phase. It was bought out by Intriva Capital in 2020, which stated it wanted to invest in the business to grow it at a rapid speed. Previously, it received another £3 million in backing in mid 2018 from respected investors, taking total investment in the company to more than £9 million since 2014.

What is Lending Works' minimum lending amount and how many loans can I lend in?

For just £100, lenders spread their money across thousands of loans.

Does Lending Works have an IFISA?

Lending Works' lending accounts are available as IFISAs.

Visit Lending Works*.

Independent opinion: the opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.

All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from Lending Works and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×

Why are Orchard’s interest rates different?

Orchard’s lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Orchard’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Got it

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×
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