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Our P2P Ratings Are Tough On P2P Companies – And You Should Be Too
We at 4thWay are tough bordering on mean when we assess P2P lending companies. This is reflected in our recently upgraded P2P ratings.
I want to tell you about these new PLUS Ratings, now shown in our comparison tables, so you know how you can use them to help improve your lending decisions and, I hope, so that you spread the word about them or perhaps take 30 seconds to tell us what you think of them here: email@example.com.
I also want to explain to you why it makes sense, as lenders, to be tough when analysing P2P lending companies – just as we are.
How to be mean
To calculate a P2P lending product's PLUS rating, firstly, we conduct rigorous stress tests on the company's complete history of loans using international banking standards – the Basel standards. This means pretending a recession, property crash, financial crisis or similar disaster will occur and then seeing how much losses rise as more borrowers can't repay more of their loans.
The banks usually just have to do some low-level Basel stress tests, as if they were hit by a 1-in-20-year recession (or similar disaster). But, since we're mean at 4thWay, we stress test P2P lending platforms to Basel's far tougher 1-in-100-year framework.
This means that the number of borrowers defaulting goes up as much as 5-6 times, and the amount of bad debt that the P2P companies recover on each loan can be lower too.
We also assume that all late payments will turn into defaults, and we assume that the defaults occur almost instantly, in one go!
In the case of loans secured against property, our stress tests also mean a property crash leading to repossession and a distressed sale at 55% below the property valuation.
We also dig through the detailed loan data provided by the P2P lending companies to make adjustments for consistency, check for hidden dangers such as rolled over loans, account for borrower-grading discrepancies (what our chief risk modeller unpronounceably calls the “heterogeneity and monotonicity of the loanbook – say What?), and more.
But, with all that, most P2P lending companies fail to get a PLUS rating simply due to not having enough data (or not supplying it) or too short a history.
The Basel tests already provide for adjustments based on quality of any security taken, and also for the the varying risks of different types of loans. Yet for those that have just scraped through an adequate history to get a PLUS rating, we only rate them after adding huge penalties to their Basel results.
We then offer some relief to the P2P lending companies by adding on any protections they offer, such as reserve funds and insurance.
The PLUS Ratings methodology gives platforms with intrinsically higher risk one shot at redemption: they can still earn P2P ratings from us if they pay high enough interest to individual lenders like you and I to recover our losses in a reasonable timescale.
For a P2P product to be awarded a PLUS rating, we have to expect that losses in a severe recession will either be recovered within the typical period that loans are repaid in at that P2P company or within six years, whichever is shortest.
To get a 5/5 rating, we have to be convinced that lenders who spread their money across lots of loans are likely to recover all losses inside just two years (if they make a loss at all).
Needless to say, it's not easy to pass our tests to get a 4thWay PLUS Rating. Just six platforms out of 64 have currently achieved any rating at all on 17 out of 18 of their products.
More will achieve P2P ratings from us when they supply enough data or have enough history, and we expect to get at least one more over the next few weeks, so watch this space.
Why are we so tough and nasty?
After reading that, I think you’ll agree that we're pretty nasty to the P2P lending companies when rating them and we don’t know any other independent (or even “dependent”) experts that are this severe, but we think it makes sense to be strict and tough for three reasons:
1. Because this is a new industry, so lenders are naturally – and understandably – more wary than with traditional investments.
2. Because there’s a lot of debt in the UK and the world right now, which could lead to a worse than usual recession or crash at some point. We think that until that debt level is finally reduced, all investors and lenders should have an extra layer of caution – whatever they're investing in.
3. As the great investor Benjamin Graham always said: investors – lenders – should invest (lend) with a “large margin of safety”.
As competition intensifies and the peer-to-peer market expands, some platforms might look further down the food chain for borrower customers or interest rates might fall too far. We’ll be watching this very closely and the 4thWay PLUS Ratings will change as we measure moves in the underlying risks and interest rates.
You can see a bit more about how our P2P ratings work – what we measure and how – here.
Our P2P ratings aren’t the be all and end all
We’ll be constantly improving our PLUS ratings when we can confidently do so, but we have to admit that this is not the end of the line in your research, since, while they are conservative, our P2P Ratings are still a sort of forecasting tool that might not always be right. They are more a guiding starting point for your research.
While our P2P ratings (or lack of them when a P2P opportunity is unrateable) can say a lot about the skills and experience of the people behind each P2P lending company, you should still satisfy yourself that they have relevant banking experience, and a lot of it.
You will also want to consider other factors, such as whether the platform might go out of business, whether you think it is simply lying to 4thWay or us individual lenders, or committing fraud, or what currency exchange price risks there are if the loans are in foreign currencies. So use your heads. Read our simple guide 8-Step Guide: How To Lend Safely And Choose P2P Lending Platforms for more help.
All platforms with 5/5 4thWay PLUSes
5/5 means that we believe in a very severe recession/crash it will take 0-2 years to recover your losses based on the interest rates currently available[supsystic-tables id='24']
Table updated automatically as ratings change.
*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 Funding Circle, Landbay, Lending Works and RateSetter, 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.