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Lending Works Review
Below is the latest Lending Works review given by one of 4thWay's specialists.
On 14th December, 2021, Lending Works changed its business model, so that lending is now only done by financial institutions. Inidividual lenders will see their existing loans steadily repaid. I currently have no concerns about lenders getting their money back, as I expect a smooth transition. If you still want to read the last version of the Lending Works Review, it's below.
4thWay's Quick Expert Lending Works Review
A good risk-reward balance, in some ways outperforming pandemic expectations, but mistakes have shaken confidence of some lenders
Lending Works review: their best-rated product
This account is currently paying 4.5% interest for new lenders lending in 2021.
Note that existing lenders (not new lenders) can currently expect to earn less interest on their loans from earlier years. 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 £240 million in personal loans. It temporarily closed to new lending due to the pandemic, but it 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 lost money.
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.
Lending Works has a liquidity fund, called Shield, to cover expected losses, being 10.34% of the size of the outstanding loans. That's made up of £632,602 cash in the pot and £3,639,696 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. However, it's still a very useful feature and Lending Works has said that it will cross-subsidise different years of loans when it needs to and if it can.
Liquidity funds and reserve funds are the first defence against losses, but not usually the main defence. The main defence, especially in economic downturns, is the interest that you earn to offset bad debts.
Lending Works during COVID-19
Lending in 2021
Lending Works has restarted lending in 2021, after pausing for many months last year. 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.”
It's taken huge steps to protect new lenders from any higher bad debts in the aftermath of the pandemic. It has boosted the cash in its reserve fund and is diverting a far greater amount of money from borrowers' interest to the reserve fund on a monthly basis. It's also tightened lending criteria.
Lending Works had also shut down its early-exit feature, which is where lenders can try to sell their loans to other lenders to get their money back before borrowers repay them naturally. This feature has also re-opened in 2021.
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 exiting lenders could easily suffer an overall loss if P2P lending companies allow this to happen.
Lending in 2020 and earlier
Existing lenders from last year and earlier years were probably shocked when Lending Works introduced negative lending rates. However, Lending Works tells us that no lenders have ever been sitting on a loss, because they haven't applied negative lending rates to loans that have earned no interest.
The economic downturn last year was, by at least one measure, a 1-in-300-year event. Despite this, all lenders have still made a profit on their loans and Lending Works expects all lenders to have a profit by the time all their loans are repaid. 4thWay specialists' detailed assessment of Lending Works' data supports this claim; at the current trajectory the loan book should remain substantially profitable overall, even if borrowers' situations worsen further when government support winds down later this year.
Some lenders are calling the negative lending rates “losses” or “retrospective action”. We've not seen any proof of losses. Negative lending rates are comparable to what happens at other P2P lending companies when a substantial volume of bad debt occurs that is greater than the past few months' interest earned. So long as your portfolio of loans is up overall, the gains on your investments have slipped backwards, but not turned to a loss. It's the same when the stock market rises a lot and then falls a bit – you're still in profit.
The reserve fund has been packed for existing lenders' benefit at least as much as for lenders in loans from 2021.
Lending Works has mis-stepped in several ways, in terms of how it has communicated to lenders. I recommend this related further reading on all the above:
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.
This has slipped during the most recent downturn to an average of 3% for loans approved in 2020. We don't yet have enough figures from the banks to make a comparison, but since it is a 1-in-300-year event, we expect slippage at almost every financial institution.
The target lending rates shown today for new lenders are taking into account higher bad debts on one hand, and better protection from the reserve fund and tighter lending criteria on the other.
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. (As it's pandemic time, it's sensibly, temporarily reversed course on approving any loans to borrowers further up the risk scale and focusing on higher-quality borrowers.)
Lending Works* has so far proven adept at selecting borrowers.
In earlier years, Lending Works had underestimated bad debts and lenders had their rates lowered as a result, although they remained positive, not negative. Some lenders hit by the earlier reductions and then by negative rates will have had their confidence in Lending Works shaken.
However, in recent years Lending Works 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. And we can't blame Lending Works for a pandemic hitting.
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.
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?
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.
Since Lending Works restarted lending in 2021, the coverage against bad debt and the risk-reward spread has improved further.
Lenders who lend and re-lend patiently through a downturn and out the other end improve their chances of coming out with positive results even further.
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. That said, up to this point, the Flexible Account has outperformed expectations and is holding up against this pandemic.
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.
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.
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