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The P2P Lending Accounts Offering Powerful Extra Protections
The main ways that peer-to-peer lending providers protect you from losses are really important. They involve assessing the borrowers properly and setting interest rates appropriately. For property lending, it also means assessing the property put up as security correctly.
On top of that, you as an individual lender need to make sure you spread your money across a large number of loans.
Yet a couple of the UK's peer-to-peer lending companies currently offer you substantial additional protection against losses.
Putting their money where their mouths are
Kuflink* has been in the bridging and development lending business since 2011 and it has arranged £250 million in P2P lending since 2016. It pays out around 7% interest.
HNW Lending began in 2014 and has completed £125 million in lending, mostly in bridging loans, although also secured against vehicles or other valuable items. HNW Lending pays 6%-7%.
Both of these P2P lending companies put money directly into the same loans and offer you first-loss protection. In Kuflink's lending account where you choose your own loans, Kuflink itself will lose the first 5% of every loan that goes bad and can't be recovered.
Meanwhile, HNW Lending will usually lose 10% of each and every loan. (A small number of loans have a lower first loss.)
I like seeing them put their money where their mouths are.
They both take this one step further than that
Both of these providers also cover losses in more situations.
In the few individual loans that have suffered any losses, Kuflink has so far taken on those losses anyway for individual lenders, even though it's not contractually obliged to. Reassuringly, if it hadn't done so, lenders returns would only have been reduced by about 0.2%.
Kuflink's strategy particularly for its auto-lend accounts is to buy out lenders on troublesome loans in the first instance, if it can. That's how it has absorbed those losses.
It's noteworthy that Kuflink also has two years' worth of wind-down costs covered in advance and segregated solely for the purpose of gently closing its online lending platform, in the event it needs to. It reassesses the amount needed every month and tells the regulator about it. So this is also putting a lot of cash to lenders' protection.
HNW Lending has a cash surplus in its auto-lend account, which is covered by a spread between what the borrower pays and what lenders receive. This surplus is used for a few purposes, but one of them is to cover late payments and ultimately to cover bad debts.
While HNW Lending offers no guarantees that its surplus will always fully cover all lender losses, 4thWay's specialists are estimating that the current surplus is easily sufficient to cover any possible write-offs of bad debt that lenders could expect from the loans that are performing badly at present.
On a related point
Kuflink and HNW Lending aren't unique here, but they do also look to spread your money automatically, if you use their auto-lending accounts.
Kuflink* tries to spread your money over five or more loans, although you should end up with a lot better than that quite swiftly. You could stagger putting your money into the lending account over a few months, as that increases the spread more quickly.
HNW Lending* spreads your money across at least 15 loans, although in recent years it has usually been a lot more than that.
They also have this in common
It might be no coincidence that they are both profitable companies. This is not yet the case with many other peer-to-peer lending providers, which are still receiving investment from outside sources in order to grow into profitability.
HNW Lending has told us it's been profitable since it started. Its public accounts don't have enough details to confirm that and they're not audited, but it's highly plausible that its a profitable business.
Kuflink's audited accounts have shown profit for the past couple of years and it's on track to have much larger profits again this year.
How do they pay for this protection?
In HNW Lending's case, first loss comes from the CEO's own pocket. Most likely using profits he's made in his own business.
Kuflink seeds the first loss with cash from its other lending business, which it has been running since before starting in P2P.
Both Kuflink and HNW Lending can afford the other protections mentioned here partly by reducing lending interest rates. You can earn 8% to 12% at some other, similar providers, but they don't come with any of these enhanced protections (which are technically called “credit enhancements”).
So all lenders are earning a few percentage points less and the difference is used to cover any bad debts on individual loans. This reduces the risk that any one lender is particularly unlucky with the batch of loans you have.
Both their records have been exceptional and the current trajectories of the entire loan portfolio show that we can expect them to handle a severe recession and property crash well.
For these reasons, they have both earned the calculated 4thWay PLUS Rating of 3/3. 4thWay's ratings have so far always been accurate, although you should still spread your money across at least six lending accounts to truly contain the risks.
HNW Lending's minimum is pretty weighty, as you need to lend £10,000 (£5,000 in the IFISA), but you can choose to spread this automatically across at least 15 loans.
The Kuflink minimum lending amount is £100, even in auto-lend where there is some auto-diversification. Visit Kuflink* or read the full 4thWay Kuflink Review, which was substantially updated in March after a recent reassessment.
Stay on top
Any P2P lending companies that offer credit enhancements, such as first loss, add a layer of complexity that keeps 4thWay busy in assessing them. There's a lot of regular assessing, interviews, data, cross-checking and analytics that needs to be done to gain a level of confidence that all is well and all remains well.
We pass that on to you. Sign up to our newsletter if you want to stay informed about these two P2P lending companies and other complex providers (as well as the more simple ones of course).
Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.
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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.
*Commission, fees and impartial research: our service is free to you. 4thWay shows dozens of P2P lending accounts in our accurate comparison tables and we add new ones as they make it through our listing process. We receive compensation from HNW Lending and Kuflink, and other P2P lending companies not mentioned above either when you click through from our website and open accounts with them, or to cover the costs of conducting our calculated stress tests and ratings assessments. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.