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How To Pass Loanpad’s Appropriateness Test
Loanpad, like all other P2P lending websites and IFISA providers, gives you a little test before you lend to ensure you know what you're doing.
Loanpad* goes further than just about any other P2P lending website to make its lending test a real one, while simultaneously helping you to understand what it does and what the risks are. I find this admirable, because it could just make it too easy to pass so that it gets more customers.
With Loanpad, you need only take the test once and you can have as many attempts as you need. If it takes you more than four attempts, Loanpad will require an additional confirming of understanding the risks.
Who can lend through Loanpad?
I'll help you understand Loanpad's questions in a minute. Firstly, the people who can lend through Loanpad with no restrictions are:
- A self-certified sophisticated investor. It can be easy to certify yourself; e.g., if you have lent in two P2P loans or lending accounts.
- A high net-worth investor – with £100,000 income or £250,000 in wealth.
- A professional who is certified as a sophisticated investor by an appropriate firm in the finance industry.
If you don't select one of those above categories, you can still lend. But Loanpad expects you to undertake not to lend more than 10% of your savings pot. You'll be what's known as a retail investor.
However, as soon as you are able to pass the self certification, you may upgrade your status. Both Loanpad's lending accounts involve lending in the same portfolio of loans, so you would need to open a second P2P lending account elsewhere, and start lending. Once you do that, you can upgrade to self certified. Then you can drop your self-imposed limit of 10%.
How to pass Loanpad's Appropriateness Test
Loanpad has requested that we don't tell you the answers to its multiple-choice questionnaire. It's not like us at 4thWay to restrict information from our website users. But here Loanpad is just keen to ensure you genuinely understand how it works. I respect that, so I won't reveal the answers to you for Loanpad directly. But I will give you nice simple guidance that helps you understand Loanpad better, while enabling you to easily answer the test.
- Just one answer is correct for each question…
- …Except for one question, where you have to select true or false for every answer.
- Loanpad mixes up its questions at random, so you probably won't see them in the order shown below.
- After each question, inside the gold lines, I provide more information if you need help understanding the questions and answers – and understanding Loanpad better.
About 4thWay's series on How To Pass The Investor Tests
Warning: taking these appropriateness tests (investor tests) can cause pain or boredom! So, while 4thWay users are far more knowledgeable than most, we want to make things quicker, simpler, more educational and more understandable for you. You get plenty of help below. And you get plenty more help for many other peer-to-peer lending and IFISA providers in our How To Pass The Investor Tests series.
I'm sure I don't need to ask you to please make sure that you do your research thoroughly on all peer-to-peer lending and IFISA providers. You can do that by reading 4thWay's guides and provider reviews, and by looking into the opportunities for yourself.
If you can't correctly answer the questions in an investor test by yourself, you probably need to do a lot more research. Because the questions they ask cover just the bare basics about how they work. The tests don't inform you about how good they are at appraising potential borrowers or any of the other essential tasks they have to do on lenders' behalf. So arguably the most important bit is missing!
Here's Loanpad's investor test:
Q1. How does Loanpad invest your money?
- Your money will be matched with loans to borrowers. This means that loan agreements will be made directly between you (as the Lender) and borrowers, but your capital and returns are not guaranteed.
- Your money is lent to Loanpad who guarantee repayment to you at all times.
- Your money is lent to lending partners who guarantee repayment to you at all times. – Your money is lent jointly to Loanpad and lending partners but your capital and returns are not guaranteed.
Loanpad* is a P2P lending website, meaning that you as the lender have direct loan agreements with the borrowers. You don't lend to anyone else who then lends your money on. This greatly reduces the risk of your money being lost in a flood of debt if Loanpad goes out of business while owing Barclays or some other bank a lot of money. Loanpad's own debts do not affect your loans and the end borrowers will still owe you directly.
In investing, there are no guarantees. The possibility of losing money is always there, even if it's sometimes remote. If there was no risk, the interest rates you earned would be no higher than savings accounts.
Loanpad does have lending partners, but their role is to supply loans to Loanpad and to assist in approving and managing loans on your behalf. You don't lend to them or to Loanpad!
Q2. How does Loanpad manage your investment?
- Loanpad will manage your investment from start to finish across the portfolio of loans. It will carefully assess and monitor each loan, match your money and collect the repayments when they are due to you. Loanpad will provide you with access to a tax statement, but it’s your responsibility to check if you owe anything to HMRC.
- Loanpad will present you with various loan opportunities. After that, it’s your responsibility to review and assess each loan and negotiate directly with the borrower in order to make an investment. Loanpad will pay any tax you owe to HMRC.
- Loanpad will receive various loan opportunities from lending partners. It’s your responsibility to request more information on each loan from the lending partner. Loanpad will pay any tax you owe to HMRC.
- Loanpad will manage your investment from start to finish across the portfolio of loans. It will carefully assess and monitor each loan, match your money and collect the repayments when they are due to you. Loanpad will pay any tax you owe to HMRC.
There's a lot going on in this question, so let me break it down:
As I wrote in the previous question, Loanpad* manages the loans and assesses them. That's with assistance from lending partners. Those lending partners lend to the same borrowers, but at higher risk, because they lose their money first.
You have no involvement in assessing loans, because your money is automatically split between outstanding loans, which is an excellent defence against losing money through bad luck. You have no contact with the borrowers whatsoever.
In peer-to-peer lending, you need to declare taxes yourself, although platforms should provide you with a tax statement. Most people wouldn't have to pay any taxes due to lending through IFISAs or due to the Personal Savings Allowance. If no taxes are due, you don't have to declare the tax at all. Read more in How Is Peer-To-Peer Lending Taxed?
Q3. Is peer-to-peer lending like depositing money in a savings account?
- Your money is being lent to borrowers and there is a risk that they will not repay. This is different to depositing money with a bank because your capital and returns are not guaranteed and you are not covered by the Financial Services Compensation Scheme (FSCS).
- Loanpad’s lending accounts are similar to savings accounts as they are guaranteed by the Financial Services Compensation Scheme (FSCS) so there is no risk up to £85,000.
- Although your investments are not covered by the Financial Services Compensation Scheme (FSCS), they are guaranteed by Loanpad.
- Your money is being lent to borrowers backed by property as security. This is similar to a savings account because the security value ensures there is no risk to your capital.
No investment is guaranteed and the FSCS never covers investment losses. This applies in peer-to-peer lending just as it does in other types of investments. In return, you have a far, far greater chance of growing your pot of money faster than prices rise than you would with savings accounts.
One of the key risks in peer-to-peer lending generally is that borrowers fail to repay. Yes, Loanpad can take the property from the borrowers and sell it to recover bad debts, but you're not guaranteed to get every penny back – even if you can usually expect it in Loanpad's case.
Q4. Could the interest rate and your earnings vary over time?
- There is no guarantee that advertised interest rates will remain constant and they may turn out to be lower.
- The interest rate is not guaranteed but can only be changed by Loanpad once per year.
- The interest rate is guaranteed because Loanpad only takes on lower risk property loans. – The interest rate is guaranteed because Loanpad has a good track record.
Loanpad can change its lending interest rates at any time. Plus, if a loan goes bad and Loanpad fails to make a full recovery of the debt, you'll also earn less interest.
Loanpad will let you know in advance of any change, and has committed to fully explain the reason why.
Q5. What does Loanpad do to reduce the risk to your investment?
Answers. Select True / False for each statement below
- Loanpad secures the loans on property assets that may be recovered and sold if the borrower fails to repay. This is designed to ensure that your investment performs, but it’s not a guarantee. TRUE/FALSE
- Loanpad has an Interest Cover Fund which will step in to cover your daily interest payments if any borrowers fall behind on their payments. This is designed to ensure that your investment has stable returns, but it’s not a guarantee. TRUE/FALSE
- Loanpad automatically spreads your investment across all loans on the platform so that the risk of your investment is spread across many borrowers. This is designed to ensure that your investment performs, but it’s not a guarantee. TRUE/FALSE
- Loanpad has a Contingency Fund which will guarantee your capital if any borrowers are unable to repay their loans. This is designed to ensure that your investment performs at all times. TRUE/FALSE
This is a good question, as it makes you think if you really understand what protections Loanpad offers.
Loanpad* does secured property lending and it will look to recover any bad debts by selling the borrower's property. The properties are not the borrowers' own homes, so Loanpad won't be throwing any families out to get your money back.
Most property lending is very secure, which results in high recovery of bad debt. Loanpad's loans are very likely to have an excellent recovery rate, because the property values are always much higher than the total loan amount. So a property sale should easily cover the full loan plus interest, in most cases.
Loanpad really does have an Interest Cover Fund, which is ringfenced entirely for lenders' benefit. Borrowers either pay interest up front or regularly throughout the loan. If a borrower misses an interest payment, the fund will step in – if there is still enough money left in it. The fund typically has 1% of the total value of outstanding loans. That's a large reserve just to cover interest.
Loanpad has no Contingency Fund to pay you back if a borrower is unable to do so. However, you have the property security, combined with your money being automatically spread across all outstanding loans. With loans like Loanpad's, these two combined are far stronger defences against losses than a typical contingency fund.
Q6. When can you withdraw your investment from your lending accounts?
- At any time.
- Potentially at any time, but only if there are other investors that are ready to take over your loans. Otherwise you will have to wait until loans are repaid.
- Only when your loans are repaid.
- At any time subject to a fee.
That question could be slightly tricky if you read it too fast.
Loanpad offers a facility for you to get out of your lending early.
As usual in peer-to-peer lending, you can only get your money back before the borrower repays if other lenders want to buy in. Loanpad says it tries to do this within one day and I'm sure it has a good record. But the fact is that you shouldn't expect that it will always be easy to get your money out quickly. That's part and parcel of P2P lending.
If there are delays to sell out, you'll still earn interest while you wait and with the same level of risk, and you'll continue to receive borrower repayments naturally.
There's no fee to leave. Loanpad's Classic account paying 5.5% allows you to leave as soon as lenders can buy loans off you. Its Premium account – which pays 6.5% – requires you to wait 60 days. In my view, if you can't wait 60 days you shouldn't do P2P lending.
Q7. What would happen to your investment if Loanpad’s business was no longer viable?
- You would lose the rights to your investment.
- Loanpad’s wind-down plan would be triggered. These arrangements are a guarantee that your earnings will be as you expected.
- Loanpad’s wind-down plan would be triggered. These arrangements are designed to ensure that your investment will continue to perform as expected, but they are not a guarantee.
- Loanpad’s wind-down plan would be triggered. The Financial Conduct Authority (FCA) would manage the wind-down of the loanbook and guarantees your investment will continue to perform as expected.
Peer-to-peer lending websites in the UK are required to have pre-written, funded wind-down plans in the event they shut down. For most P2P platforms, it's not mind-bogglingly difficult to wind down an existing loan book and it's usually cheap to do so.
Loanpad* is mostly going to manage the wind down itself, according to its plan. To save costs, it could easily jettison the staff who are not required fto or manage existing loans until they are repaid or recovered. Loanpad also continues to earn money to cover wind-down costs with each payment made by existing borrowers.
For small, manageable platforms, such as Loanpad, and with the assistance of its lending partners, this is demonstrably a proportionate wind-down plan. While it could hire an experienced third-party company to do it, that would be overkill.
So far, P2P lending websites that have been operating properly have a good record in wind down. I expect the record to remain good and even improve further, since the regulator (the FCA) insisted on clearer wind-down plans from December 2019.
For the most part, your returns during wind down will continue to rely on the quality of the loans. This is the case whether the P2P lending website is winding down or not. Most P2P lending platforms wind down for business reasons, rather than poor-quality loans, so it's not necessarily something to worry about.
The FCA insists on wind-down plans being in place, but the last thing it wants is to have to get involved itself!
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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.
We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.
The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or the FCA. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.
*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 Loanpad 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.