A score of the estimated risk of losses from bad debts in a severe recession/property crash before adding interest earned
A lower score is better. Click on a Risk Score in 4thWay’s comparison table to get more information about how that particular score was awarded or learn more about the 4thWay® Risk Scores.
4thWay® Risk Scores assume you spread your money across lots of loans, using multiple peer-to-peer lending platforms to do so if necessary. They are impartial and conservative, and they are indicators, not guarantees or promises. For use with supplementary research.
Showing the current interest you’re expected to receive after deducting:
- The P2P lending company’s fees.
- The bad debt that the P2P lending company expects you to incur.
The rate makes no deductions for taxes or for money that is not currently being lent.
Why are some rates shown different to the P2P lending company’s own website?
We convert interest rates to the same calculation so that the comparison is fair. Read more here.
Showing a brief description of the P2P lending company.
Here is an overview of each risk category in the risks comparison table. To learn even more about the details buried underneath and for more explanations and examples, see this page from our P2P Lending Guide: How to Compare and Choose P2P Lending Companies and Loans.
If you and other lenders have lent a total of £1 million and £100,000 goes unpaid, the bad-debt rate is 10%.
You can look at bad debts in terms of the amount that occur in a calendar year, e.g 1%pa.
It’s also sensible to consider bad debts by year of issue; for example, taking all the loans that were issued in 2014, what are the expected average bad debts on all those loans throughout their whole life (which could be five years).
Bad-debt provision funds
Some P2P lending companies protect lenders like you by putting aside a pot of money to pay for bad debts. If a borrower can’t repay you, the P2P lending company uses that pot to reimburse you.
You want to know that borrowers are checked for fraud and, if you’re going for low-risk loans, you want to know that they reject the vast majority of applicants.
Some P2P lending companies can repossess real property – that’s land and buildings – or personal possessions: from TVs and DVD players to rich-people’s yachts. You need to know how much this security is worth compared to the size of the loan.
Do the borrowers make regular payments, so you can see quickly if they can afford it? Or is the loan structured so that it will all be paid off at the end?
Skin in the game
How much do directors at P2P lending companies share your risks and rewards?
These risks are particularly difficult to measure, but a bare minimum requirement is to offer you a secure website (https and the padlock sign) before and after you sign in.
Regulation and other protections
All companies listed on our website must be regulated by the Financial Conduct Authority. They must also separate your money from theirs and have a plan for winding down your loans if they go bust.
Spreading your money across lots of loans – diversifying – reduces the chances that you’ll get unlucky with one borrower. If a few borrowers don’t pay you back out of 100-200, the effect will probably be very small. Consider both the 4thWay Risk Rating and diversification.
Here is an overview of each category in the costs and features comparison table. To learn even more about the details buried underneath and for more explanations and examples, see this page from our P2P Lending Guide: How to Compare and Choose P2P Lending Companies and Loans.
Lender interest rates
P2P lending companies offer loans from one month to 20 years, although six months to five years is more typical. Some have no standard lengths, so they just have an average interest rate. Interest rates shown are what you can expect to earn after bad debts and fees, but before any taxes you’re due to pay.
P2P lending companies each charge their borrowers and lenders in different ways. Some charge you fees for lending. Some charge borrowers fees. Some take a percentage of the interest you earn. And some do all three. But it doesn’t matter how the pie is cut. Your total costs come down to this: how much is the borrower paying in interest and fees, how much are you receiving in interest, and what’s the difference between those two figures? Read why in How to Compare and Choose P2P Lending Companies and Loans.
Taxes, SIPPs and ISAs
ISAS and SIPPs are low- or no-tax wrappers. Currently, there are no P2P lending ISAs, but we expect them to come in 2015. When it comes to SIPPs (a form of pension) your only option currently is a SIPP for lending through a P2P lending company called Thin Cats.
The perverse situation is that we usually have to pay tax on our bad debts, which can have a noticeable impact on the interest we earn. P2P lending companies with bad-debt provision funds enable you to legally avoid those taxes, so long as the provision fund is not overwhelmed by bad debts.
Early exit and late entry
Most P2P lending companies will let you get out of your loan early, provided another lender, or the P2P lending company itself, is willing to buy your loan off you. You might not get as much back as you lent out due to extra fees and due to other lenders offering you less to buy it. Alternatively, you might be offered more if a lender really wants to buy your loan!
Automate your lending
Many P2P lending companies do a lot of the hard work for you by automatically lending new money and regularly re-lending loan payments you receive. Typically you can set your minimum interest rate, borrower credit rating and loan length, and then you needn’t do anything else. These features mean that you don’t have to keep finding borrowers and choosing interest rates.
Ease of earning interest
Normally you earn interest while your money is being lent. It can sometimes take days to lend all your money. or to re-lend it after you receive a repayment. However, one P2P lending company (Wellesley & Co.) will pay you interest as soon as you deposit your money and choose a period of time to lend for, and you will earn interest on the whole amount for the entire period; you don’t have to worry about re-lending it.
Choosing interest rates
Sometimes the P2P lending company sets lenders’ interest rates and you just decide whether you want to lend your money at that rate. With other P2P lending companies, it is us, the individual lenders, who set the interest rates in a reverse auction, so the lenders who offer to lend to borrowers at the lowest interest rates win the bid to lend.
Some P2P lending companies always pick your borrowers for you. Typically in this case, you won’t even know who your borrowers are. Your money is automatically spread across dozens, hundreds or thousands of borrowers. Other P2P lending companies allow you to choose your own borrowers from the list of borrowers they have checked and approved. In addition, some of these let you automate selection based on criteria such as interest rate, borrower credit rating and loan length.
Currently, all P2P lending companies take the full responsibility for chasing missed payments and repossessing property.