P2P Lending And COVID-19: Lots Of News And Updates, Nov 2020
It's been a lot of work trying to stay on top of all the P2P lending companies for you during the pandemic. as we sought extra information, meetings and data submissions from the P2P lending companies.
Here's a summary of much of our recent research. These COVID-19 updates are shown in the order they appear by default in the 4thWay comparison table. This means:
- They are shown with highest 4thWay PLUS Rating first. That's a measure of the risk-reward balance assuming a recession or property crash, using international banking methodology.
- Then by 4thWay Risk Rating. This is a measure of risk only (i.e. rewards are excluded), which can indicate the potential for high losses or for very variable returns between lenders.
- Next, by interest rate.
- And finally, the P2P lending companies that currently don't accept new lending due to the pandemic. These are not shown in the comparison table at present, although we still review them and those reviews are available from our Guides, Reviews & Tips page.
Negligible impact of COVID-19 on Proplend's existing core loans
Proplend's core loans are commercial-property loans, which includes landlords who own offices or retail space that is currently being rented out.
Bad debts are up at Proplend during the pandemic, but they are very, very far away from causing the average lender an overall loss. Even if we assumed all the loans that have minor issues turn into bad debts, we'd then have to see the proportion of loans with bad debts go up four-fold from there before the average lender might suffer losses. And that assumes a severe property crash coincides.
Proplend* has had a number of loans that were temporarily unable to pay their monthly dues, but they are all now doing so.
COVID-19 on Proplend's short-term bridging loans
Proplend's bridging loans have had more problems, although this is to be expected for these kinds of loans, which is why interest rates are typically three percentage points higher.
Proplend has been cautious on this new type of lending, as it has still only approved a small number of these loans. And 4thWay's specialists have been unanimous in thinking that lenders should limit their exposure to these loans until Proplend has developed a record on them.
One in eight of these bridging loans is officially a bad debt, although Proplend is not currently taking legal action but working with the borrowers, who have suffered pandemic-related issues. Another one in eight have passed their repayment date, but they continue to pay interest. 60% of all bridging loans are now repaid in full. While an overall lending loss on these loans is still technically feasible, it's an ever-shrinking possibility.
New lending continues
Proplend continues to approve a good number of new loans, albeit with tighter checks. It remains one of 4thWay's very top picks for lending during the pandemic.
17 loans have needed to be rolled into new loans as a result of the pandemic, although these loans are usually for less than the original amount. Sometimes, for example, the borrower has managed to sell some of the units of the property it was developing and it needs more time to complete the sale of the rest. Four of these loans have been repaid and the rest are in good standing.
CrowdProperty still has no bad debts on its 200 or so loans, so it's a long way off causing lenders any indigestion.
New lending continues
CrowdProperty has kept up the deal flow throughout the pandemic, so that new lending has not stopped.
2014 and 2015 loans are now all fully repaid, including all HNW Lending* loans that fell late or turned bad at some point. For 2016, just some of the bad debt remains, and that has come down as recoveries have come in.
For later years, as you'd expect at this point in their lives, bad debts have gone up. This is especially so during the COVID-19 period, where many borrowers have been unable to repay, at least temporarily, or have asked for forebearance.
Outstanding bad debt is currently double the amount in normal times. Critically, this sort of event is expected for loans of HNW Lending's type. While I don't expect full recovery of all pandemic bad debt, the security and interest rates are sensible for covering the risk. The properties the borrowers own still back the loans and the average loan size is very low compared to the property valuations.
HNW Lending has almost invariably, ultimately, recovered bad debts in full up to this point, as its closed years show. Lenders continue to earn interest on loans even if they are late for payment.
HNW Lending says new lending should take off again soon.
We only just updated you on Kuflink, which recently became the latest to earn the top 4thWay PLUS Rating, so check out the Kuflink Review and read Recent Movements In The 4thWay PLUS Ratings for more details. Kuflink is still approving new loans during COVID-19.
It's been quite a while since anyone at 4thWay updated you on Assetz Capital, so I'm going to give a lot of details here.
How existing loans are performing
For the most part, the proportion of loans that have gone bad at Assetz Capital* hasn't changed since the economic impacts of the pandemic started. The proportion of development loans that have gone bad has ticked up, but this was expected and continuing the trajectory that started as Assetz Capital's loan book matured further.
That is not to say there will be no impact: there is sufficient evidence to say with certainty that additional loans will experience losses as a result of the pandemic.
Potentially 38% of the loans have had some forebearance related to COVID-19, which could involve such things as interest or repayment holidays. Of those, just one loan has turned bad so far and 5% of them have been repaid.
To slice up Assetz Capital's data submissions another way: 18 months ago, Assetz Capital was watching 9% of its loans closely, as it suspected those borrowers might be weaker than the rest. It's now watching 35%.
In the past, the majority of loans getting additional monitoring of this kind have repaid in full, or ultimately recovered in full if they turned bad.
Assetz Capital's bridging, development and SME loans are all currently well within tolerances. Its buy-to-let and rented commercial property loans (we're talking pubs, stores and B&Bs) are the most at risk area. Around half the outstanding loans that are not late or bad debt are currently in enhanced monitoring. You can be sure that some of these monitored loans will ultimately be classified as bad debts, and legal action will be required to repossess and sell the borrowers' property to recover as much as possible.
Defences against pandemic bad debt
Assetz Capital* offers a large amount of downside protection aganst more loans turning from merely “monitoring” to bad debt that needs chasing.
The protection against losses are substantial, as they need to be. Theaverage Assetz Capital lender who has lent across all of Assetz Capital's loan types could likely suffer half of those loans in monitoring turning into bad debt. They are still most likely to have positive returns after recoveries are completed.
That's still true even if Assetz Capital is ultimately unable to recover as much bad debt as usual, due to economic or property-market conditions. At this stage – which is still quite early – we have no data or reason to believe that the proportion of loans turning bad will be anywhere near that high.
Most loans in monitoring don't progress to become bad debts, and Assetz Capital has a good record of recovering them when they do. To give you an indication, of loans that should originally have been repaid two years ago that are in monitoring, late without agreed extension or have officially turned bad, 86% is repaid. Assetz Capital expects more recoveries to trickle in so that 92% will ultimately repaid. Lending interest on those loans and all of the good ones has easily covered those losses and left satisfactory profits for the lenders who have spread across lots of loans.
Update on Assetz Capital auto-lending accounts
Turning to auto-lenders using reserve funds, which pay lower lending rates.
The one area where Assetz Capital is not completely open and transparent with us is how its reserve funds work. This is one reason why most 4thWay specialists prefer its manual-lending account, which pays all the lending interest out, without diverting any to a reserve fund. The strategy is to spread lending over as many loans as possible over as many months as it takes.
We've been given a plausible-sounding reason for the secrecy around the workings of the reserve funds in confidence – as much as we do not like the opacity. So we're going a little bit on faith with Assetz Capital that excess interest is being diverted to the reserve fund in advance of bad debts occurring.
The limited data we do have more or less supports our faith, although it's quite possible that Assetz Capital does not fully supply these reserve funds up front. Even so, these accounts are most likely to be roughly as safe as the manual-lending account.
Lending has restarted
Assetz Capital* has restarted new lending after a six-month pause, but it's just been a trickle. It's too early to see whether it will turn into any substantial amount of lending through its online platform. (Update on the 22nd February, 2021: the trickle didn't turn into a substantial number of new P2P loans. Consider lending to be not restarted after all.)
Assetz Capital might be distracted by Coronavirus Business Interruption Loan Scheme. Assetz recently started approving these loans as well, which are government-backed loans to businesses. These types of loans are not available through P2P and are funded entirely by financial institutions.
New lender fee continues
Lenders using Assetz Capital have been paying a new, temporary fee of 0.9% per year to support Assetz Capital through the pandemic. Assetz's income must surely have plummeted since March. The bulk of its revenue comes at the start of a loan, and hardly any new ones were approved for many months after the initial lockdown started. This fee helps to keep Asssetz Capital running.
CapitalStackers* is clearly holding up very well indeed, with excellent results for lenders. Its high interest rates routinely demonstrate that very high rates don't always mean very high risk.
CapitalStackers' outstanding loan book is heavily weighted towards residential developments, rather than commercial property. Commercial property has been more at risk during the pandemic due to business revenue plummeting.
It has seen just a few loans suffering noteworthy problems due to the pandemic, but just one of those remains to be repaid. That loan is on a development that now has a pre-sale agreement with a housing association, so it's looking good. Existing loans are, on average, taking a little longer to be paid off than normal, which is to be expected in these times.
New lending continues
CapitalStackers continues to approve loans through the pandemic, albeit fewer than last year.
Loanpad* is one of the most impregnable investment opportunities available in any asset class, be it P2P lending, bonds, shares or anything else.
It has seen a loan turn bad for the first time during the pandemic. However, the property backing that loan is worth over three times the loan amount, and Loanpad lenders will be first in line to receive their money when the property is eventually sold. The cover against risk is phenomenally good.
Three other borrowers are late to repay or have received official extensions. Two of the three are under 50% of the expected sale value of the developments. One of those two developments is at least 75% completed and the other is complete. The third loan is for under 35% of the current value of the property.
Loanpad offers the greatest cover against losses of any P2P lending company through the level of property security it provides and the high-quality borrowers. It's a pretty safe bet that none of these loans will lose lenders any money.
All Loanpad loans come through lending partners that also lend heavily to the same borrowers while taking a junior position, meaning that they will lose their money first if a borrower is unable to repay the entire debt. Loanpad's highly experienced loan partners have an excellent, long-term record. They also currently expect that they will suffer no losses on their own loans.
Loanpad interest rates
It had to happen and we expected it for a long time: Loanpad has been lowering its rates throughout this year in a schedule it announced to lenders early on.
The reason: the reward that Loanpad* lenders have been receiving for the incredibly low risks involved has simply been far too high. The rates have not been coming down due to COVID-19, but because it's normal to offer borrowers lower rates when the risk of lending is lower. This impacts lending rates too.
The lending rates remain very attractive for the risks, even if they are no longer exciting, at just 4% from 1st December. Loanpad doesn't expect further decreases at this stage.
New lending continues
Loanpad has continued to offer new loans of at least the same quality as they offered prior to the pandemic.
Crowd2Fund hasn't provided enough information for us to assess the risks for quite a while, and not at all during the pandemic.
It temporarily stopped new lending, but it has restarted again. It has told lenders that it will be stricter in approvals at this time, due to COVID-19.
After helping an unspecified number of its borrowers to get emergency support from the British Business Bank, it has stated that its “default rate and losses have remained stable during the COVID-19 lockdown due to these efforts”. However, with no supporting information or data, we can't assess the actual situation. For example, it might have a lot of loans that it is offering forebearance to in the hope that the business borrowers turn themselves around. And indeed, we wouldn't expect the actual crystallised losses to rise this early after the pandemic started anyway.
Buying and selling existing loans currently not possible
Crowd2Fund says that its exchange is remaining closed because it's “still implementing improvements, but plan to re-open both the exchange soon”. It doesn't suggest whether the pandemic is involved.
As many as half of Rebuildingsociety's borrowers have asked for support due to the pandemic, such as repayment holidays, switching to paying just the interest, or advice. This high proportion is not surprising. Rebuildingsociety's business loans are high interest, high bad debt. Interest rates average around 17%, which is paid every year, albeit on a shrinking loan amount as each loan is repaid. Prior to the pandemic, 29 out of every 100 loans had either turned bad or were late.
We've sliced up a great deal of Rebuildingsociety data, looking at the maturity of existing loans compared to past performance, and stress testing the results. We don't know how the pandemic will pan out yet, but, provided the detailed data we received is accurate, we're sure that Rebuildingsociety's existing loans will be profitable as a whole, based on what's happened so far.
Even so, high bad-debt rates means very variable performance between lenders. At present, Rebuildingsociety acknowledges that 12% of lenders have made a loss so far, and we think that this number was going to increase further even without the pandemic. With the pandemic, the proportion of lenders who will lose money overall will rise further, although still remain the minority.
These loans are not for everyone. To contain the risks to a sensible level, lenders should set a maximum limit that they would be willing to lend through the Rebuildingsociety platform in total. We calculate that you put no more than about 0.5% of your money in any individual loan. You must also keep lending until all your loans have been repaid. If you sell all your loans because you suffer lots of bad debts, all you'll be left with is the bad debts, and none of the active loans paying high interest rates.
Temporarily paused new P2P lending
LendingCrowd* does small business loans, so it has now switched to doing government-backed loans to support companies through the economic fallout of the pandemic and reactions to the pandemic, such as the lockdown.
Specifically, LendingCrowd is now just offering Coronavirus Business Interruption Loan Scheme loans to businesses. LendingCrowd is not allowed to offer these as P2P loans, which means that, for the time being, no new loans will be offered to lenders through LendingCrowd's online platform.
Demand for normal unsecured small business loans has plummeted, as businesses go for government-backed loans on very attractive terms. As a result, LendingCrowd has approved next to no loans over the past six months or so.
CBILS loans can be taken out up to the 31st January, 2021, although this could be extended for a third time.
Since new lending is currently not allowed, LendingCrowd has temporarily been taken down from 4thWay's comparison pages.
LendingCrowd not releasing impact of COVID-19 on its existing loans
LendingCrowd* has so far been one of the more open and transparent P2P lending companies. Unfortunately, it's taken a slide backwards: it's decided to withhold any details about the impact of COVID-19 on its loans.
Both publicly and in the daily loanbook data we receive, it states that no loans issued in 2020 are late. This would be implausible even in a non-pandemic year. It means that LendingCrowd must be classifying all late loans as COVID-19 forebearance, but, at the same time, it's not revealing how many have forebearance.
This time lasts year, it had nearly 1% of loans approved that same year that were in arrears. It had 0% bad debt for the same year. Today, it has 0% in arrears, presumably because it classes all late loans as late due to COVID-19, but over 2% of the amount lent has turned bad. This is probably indicative of the pandemic.
On the flip side, looking at the loanbook data provided to 4thWay, loans issued in 2020 have been repaid at a faster rate this year than last year. This suggests that many businesses are paying down debt as a result of the pandemic.
Here's what LendingCrowd told 4thWay
“We haven’t given out public numbers as support needed was fluctuating – we had borrowers who made enquiries about forbearance and didn’t complete an application (continuing to pay); we had borrowers who requested forbearance and then repaid in full (after receiving a BBLS or CBILS elsewhere); we had borrowers on a repayment holiday who then have returned to full repayment; we had some who we have refinanced into CBILS (within our refi limit); and we had a very small number who required an additional interest only period.
“Numbers on forbearance are low. We made contact with every single borrower, the majority we spoke to multiple times through this period to provide support and indeed continue to monitor their progress carefully. Sorry we don’t give out numbers as these are commercially sensitive but I hope this gives you a picture of the breadth of support we were able to provide.”
So each of those two paragraphs gives us a separate reason for not disclosing the impact of COVID-19: because the situation was fluctuating and because the information is commercially sensitive.
It's now over six months since businesses started feeling the impact of the pandemic, which is plenty of time to sort through much of the fluctuations.
When something is commercially sensitive, it means that revealing it could negatively impact their business somehow. This might be to hide a trade secret, to hide profit margins (which might help competitors to price their products better, i.e. their interest rates) or it might be because the information will be seen negatively by customers (i.e. lenders).
LendingCrowd doesn't explain why it has previously provided over one hundred data points to 4thWay and still routinely provides a complete, updated loan book showing the status of every loan, but it won't provide the true status of a loan if it's impacted by COVID-19. So telling us that this “low” figure is “commercially sensitive” is not an explanation under the circumstances.
The lack of transparency on this point is disappointing and we must consider principle three of 4thWay's 10 P2P Investing Principles. Yet it's not time to react. At this early stage, I'm not changing my view that LendingCrowd pays generous interest rates to cover a substantial amount of risk, when lenders spread across lots of loans.
Zopa has not provided any details of its results during the pandemic, so we don't know how many of its borrowers have been affected.
New lending is continuing, but Zopa is not providing details, so we don't know how much is happening at present. We do know that it's tightened its lending criteria quite substantially, and this is likely to mean new lending is much better protected against pandemic bad debts, provided you lend across lots of borrowers – preferably well over the minimum of 100.
I'll let you know when further information is forthcoming.
Funding Circle stopped doing P2P lending many months ago to do Coronavirus Business Interruption Loan Scheme loans. These are government-backed loans to businesses. Funding Circle has therefore temporarily been removed from the comparison tables.
Funding Circle doesn't provide 4thWay with its full loan book to assess it, so we can't say a great deal about its existing loans. It previously had no 4thWay PLUS Rating, due to lack of data.
Funding Circle itself said that it had to deal with a “huge increase in contacts” from borrowers needing support of some kind. So it expanded its team three-fold and invested in technology to make its team's work more efficient.
If we get any hard data or information from Funding Circle, there'll be an update on 4thWay.
New lending paused
Octopus Choice paused new lending and withdrawals very early in the pandemic. It said: “As part of this decision, we chose to waive our platform fee, passing this onto our investors, which meant that investor returns would increase from c.4.0% to c.5.5%.”
Its interesting how Octopus Choice lowers fees for lenders, while Assetz Capital increased them. We probably need to bear in mind that Octopus Choice is part of a far larger investment group that is highly profitable and can easily swallow the loss of fees for a while.
Octopus Choice has provided no data and has generally not been great at doing so in recent years.
What we know is that the proportion of late loans that are recovered in full within three months came down significantly, from 83% to 70%. However, most of this change likely occurred in the 10-12 months prior to the pandemic. That figure is also correct to 30th April 2020, so we don't know the situation now.
Unfortunately, Octopus Choice has provoded no further information or data on the performance of existing loans since the pandemic started.
It's still early days
The bottom line is that most lenders can expect to be doing satisfactorily at this stage, especially when using P2P lending accounts with 4thWay PLUS Ratings or 4thWay ALT Ratings.
Still, some of the smartest people in the world of investing and economics have been saying that they don't know what's going to happen with the pandemic in terms of the damage it will do.
Money lending will certainly perform considerably better than the stock market. And P2P lending, on average, offers a better risk-reward balance than the banks can expect to get on their own lending, when you stick to the better platforms.
Keep your money spread around and keep lending throughout. Don't let bad debts occur and then sell all your good loans. If you follow this, you will still have positive returns by the time all the dust settles.
Read more: Recent Movements In The 4thWay PLUS Ratings
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.
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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