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What Happened to Lenders When These P2P Firms Closed?
With P2P lending company GraduRates closing down gently, I think its appropriate to take a look at the other companies that have gone out of business. Because I don't want my money disappearing, do you?
Let's see what has happened in these past nine years since P2P lending began:
YES-Secure and Quakle
The biggest failure has been YES-Secure, previously called Encash if I remember correctly. Although it matched loans in the hundreds of thousands and had bad-debt rates above 20%, it was able to close down by returning lenders their remaining money.
The most prominent case was probably Quakle, because lenders lost most of their money when this dreadful business closed down. Although according to thisismoney, “unverified estimates” put its loans at just £20,000.
Quakle was out of its depth, basing its lending criteria on social trust and having no debt collection practices. It even had to refuse entry in the Peer-to-Peer Finance Association because it couldn't meet the minimum criteria. That's still true of other P2P lending companies today, although the association does have pretty high standards now.
Will this good start last?
Several other P2P lending companies never got off the ground. Their doors never opened, so no one except the founders got hurt.
I was expecting to find more examples, but this is about as bad as it has got in the UK.
We're lucky. In China there was a dreadful start with lots going wrong. Here, the industry has started out by being desperate to be transparent and have great processes. There's a bias towards safer types of lending, and close scrutiny of borrowers and their security. (“Security” is property we can take off borrowers and sell if they don't pay.)
UK regulated P2P lending companies are now expected to set up processes and a trustee to wind down their loan books in an orderly fashion in the event that they go out of business.
For the most part, the P2P lending companies talk a good game. Some are very convincing indeed that they have taken all the steps you would hope them too.
I particularly like to see independent trustees rather than the same management running the trust. After all, if they failed to look after our money the first time, are they going to manage it the second time?
I'm not convinced that all P2P lending companies that will ever exist will always have funded these trusts enough to really pay all the expenses of managing borrowers, repaying lenders and collecting on bad debts while there are still loans outstanding. This is something I'd like us at 4thWay to start collecting more data on, or at least more disclosure.