P2P Lending Lessons From The Sequel To the Financial Crisis

Can you believe the world’s banking regulators actually let this happen?

1. Risky lending triggered the 2008 financial crisis, so regulators banned the big banks from doing it.
2. But then those same regulators allowed the banks to lend money to non-bank lenders—who could still make the very same risky loans.

Even as that type of lending grew at an eye-watering 26% per year, regulators failed to step in.

Now it’s collapsing again, at least in the US.

My goodness.

That’s why I think this is a great time to remind you how important it is to think for yourself and do your own research. Here are two points worth keeping in mind:

1. Regulation still matters

Regulators aren’t perfect. They miss things—sometimes big things. It’s common knowledge that they often close the stable door after the horse has bolted.

They’re also not specialists in investing, so they don’t always understand what they're regulating. (That is clearly the case in P2P lending.)

To be fair, financial regulation is complex. If it were easy, we’d see more regulators with consistently good records. (And therefore not needing to hide their shame by changing their name an average of every 13 years… The UK's Financial Conduct Authority is due another change next year!) And that’s before politics and conflicts of interest come into play.

Still, the evidence is clear: on average, you’ll get better results lending through providers that are authorised and regulated, rather than taking a chance outside the system.

History shows this. Regulators may miss serious problems in the wider market, but regulated P2P and online direct lending providers generally perform better.

This shouldn't be a surprise, since providers in this space are required to get themselves regulated! That already weeds out some risks at the more fraudulent end. It's a simple check of the FCA's register, so do take the time to do so before you lend or invest.

2. Only lend through providers you truly believe in

4thWay's list of 10 lending principles starts with this rule:

‘If you have any doubt at all about lending through a specific P2P lending account or IFISA, the answer's “No”. Only lend when you're supremely confident you understand all the risks.'

Rule five says:

‘If something smells fishy it just well might be. Trust your warning instincts, those little alarms and feelings in your belly. Don't let beguiling interest rates confuse your nose; sniff around for more pleasant smells.'

And rule six adds:

‘Try your darndest not to prove you're right to invest but to prove yourself wrong. Look hard and deliberately for the weaknesses in the case. Only that way can you truly get wise and make confident decisions.'

So I count three of the ten rules that are about avoiding being dazzled by P2P lending providers you don’t fully trust.

Picture this: a recession hits, loans start running late, and bad debts begin to mount. Would you feel calm and confident about that lending account? You should only lend if your answer is a genuine yes – if you’d still feel comfortable because the loans are solid (and because you're well-spread across enough similar accounts).

How do you get a bit closer to that level of confidence?

Look for integrity, stability and transparency

The best providers stick to what they’re good at. They’re open about their loans, honest when things go wrong, and prefer plain speaking, down-to-Earthness over glossy marketing. That’s what you see with platforms like Proplend*, Loanpad* and CapitalStackers*.

If a provider constantly shifts its product line, speaks vaguely, or relies on salesy language, the track record shows: lenders usually fare worse. Pay attention to tone and consistency.

Prioritise lending standards over growth

Consider whether management focuses on lending quality – or on going for growth. A company obsessed with expansion and boasting about the size of its loanbook may cut corners on loan standards, or simply be scrambling to bring in enough fees just to stay afloat.

By contrast, providers that calmly and consistently emphasise lending standards tend to deliver better long-term outcomes. Like  CapitalRise*, for example, which Neil recently published a new review of after an in-depth reassessment.

History makes the pattern clear: if you weigh your lending towards providers with the right mindset, as shown by what they say and how they act, you can up your results even further.

Pages linked to above

Why Is Low-Risk P2P Lending Labelled As “High Risk”?

How To Check The Financial Services Register For Monsters.

4thWay's 10 P2P Investing Principles.

CapitalRise Review.

CNBC: ‘The Tide Went Out’: How A String Of Bad Loans Has Bank Investors Hunting For Hidden Risks.