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Lending Works Lending Strategy
Lending Works lending strategy is short and simple, because this P2P lending website is simple and easy to use.
You have limited strategy options available, but it still requires a little bit of maintenance.
Lending Works Lending Strategy: take it or leave it!
Many P2P lending websites give active lenders with time on their hands the opportunity to get more interest than other lenders. This is not possible with Lending Works. Everyone gets the same.
You can lend for five years or three years and you do so at the interest rate shown by Lending Works. You don't set rates yourself.
You can't bid high to try and get extra interest or bid low to try and get your money lent out more quickly.
But at least it's nice and simple. You either take the rate offered or leave it.
This stratagem is for real penny-pinchers.
Coming soon, Lending Works will be offering us lenders a dashboard showing how long it expects our money to be sitting around before it is lent out.
If you have a pile of cash and you're thinking about topping up your lending on Lending Works some more, you could do a free bank transfer of a small amount and see how long it is expected to take. Bank transfers are completed within one working day.
If Lending Works then forecasts a wait of just a few days at most, you could immediately transfer the rest of your money.
On the other hand, if it is going to take weeks, you could look elsewhere to put the bulk of your cash. But a delay of three weeks only costs you a few-tenths of a percentage point, so this technique won't make you rich!
You can try to jump the queue by switching from five-year lending to three-year, or the other way round, because there might be more borrowers already lined up on the other side.
But don't take that chance if you're already near the front of the queue, because you might lose your place and find yourself at the back of a longer one!
Choosing your minimum interest rate
You have to decide what the minimum acceptable return is for you for the risks you're taking.
At the time of writing, our calculated 4thWay® Risk Rating for Lending Works is very low at a mere 13 out of a current maximum of 50 (although the highest score will be a lot higher than 50 when we've finished scoring all the P2P lending websites).
To put this in perspective, eight out of 50 (which no P2P lending website has achieved) would put it somewhere in the region of savings accounts in terms of safety. So the risk of making a permanent loss is very low.
In addition, the score probably doesn't do Lending Works justice, because we are not able to include its insurance in our risk scores. Lending Works' insurance protects us individual lenders from losses if a borrower is unable to repay due to unemployment or accident. We don't have enough data on the insurance's effectiveness to incorporate it in the scores, but I expect it would knock off several more points.
In our view, currently you only need a small interest-rate premium over savings accounts to justify lending on Lending Works.
The danger with Lending Works is that lenders might come to see it as so safe that they pile in too much.
This will force rates down to practically savings levels. Lending Works will have backstops in place to prevent this, but that might not be enough if lender demand overwhelms them.
You can see the latest top savings account rates in Safest Peer-to-Peer vs Savings Accounts.
Spreading your money around
Lending Works has a very impressive cushion with its bad-debt provision fund (that it calls its “Reserve Fund”) and with its insurance, which I mentioned earlier.
However, that is not a replacement for spreading your money around. You should still lend to lots and lots of borrowers, because you can't just rely on Lending Works' special defences to always cover all your losses.
Lending Works automatically spreads your money across several borrowers, but what you really need to do to spread your money around enough is to lend over several months or a year.
By lending slices of your money maybe three weeks apart, you'll lend to different borrowers.
You could halve the time it takes to lend your money across lots of borrowers by lending for both five years and three years, so that you lend to more different borrowers.
Also, by re-lending the repayments and interest you receive, you'll swiftly increase the number of borrowers you're lending to.
Watch the interest rates
Lending Works allows you to re-lend your repayments automatically. (It also allows you to automatically withdraw just the interest or a mix of the interest and loan repayments.)
However, you can't just switch on auto-lend and forget about it. You need to do a little bit of maintenance. Draw a line in the sand: what's the lowest rate you're prepared to accept? And then you keep an eye on those rates to make sure they don't fall below your line.
You also have to watch out that Lending Works – like any P2P lending company – isn't slackening its standards, especially when it comes to selecting borrowers.
Sometimes, the directors at these companies will come under pressure from their shareholders, their husbands and wives, and perhaps even their own egos, to keep growing their businesses at a rapid rate, even when there's currently no room to grow.
When Lending Works is unable to grow without expanding to riskier borrowers, it might choose to go down that dark path.
It certainly doesn't always happen, but I've seen this happen many times before in other businesses. The result of a desperate, slackening of standards can be large losses for investors.
There are signs to watch for to ensure that Lending Works is not losing its disciplined approach to selecting borrowers, including:
- Its 4thWay® Risk Rating is rising, which means the calculated risks of making a permanent loss is rising.
- It is accepting a higher proportion of loan applications.
- Its bad debts or late payments are rising more than you might expect in the current economic environment.
- Its bad debts or late payments are rising much faster than its closest competitors.
- Its bad-debt provision fund is shrinking dramatically.
- Its become less transparent, e.g. the company stops revealing any of the above information to 4thWay®.
4thWay® informs its newsletter subscribers immediately if any changes to Lending Works' circumstances are possible causes for concern. (You can sign up below.) Alternatively, you can keep checking the details for yourself in our detailed comparison tables.
At Lending Works, there is no trick to getting a better deal when you sell your loans to another lender for an early exit: you just take what you get.
This means you can't sell your loan parts for more than you lent, as you can elsewhere. (Not that you can usually pull that off elsewhere either.)
You pay a high fee to leave early, which is the higher of £20 or 0.6%.
Plus, if interest rates have risen since you lent your money, you might have to compensate the lender or lenders who buy your loan parts off you. After all, they're now expecting higher rates. That might mean you get back less than you put in.
But you don't get more back if interest rates have fallen.
A better – cheaper – way to leave Lending Works is to stop automatically re-lending. As you receive loan repayments and interest, you can withdraw your money for free. Within a few years, you'll have all your money back at no cost.
That's all that's to it in Lending Works Lending Strategy.
Further reading: how to Get Started With the Safest Peer-to-Peer Lending Websites.
4thWay® Risk Ratings: no risk-rating system is ever perfect and they cannot consider all factors and future events. Read more about the 4thWay® Risk Ratings.
*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 Lending Works, 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.