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Simple Way To Improve Loan Selection & Lower Risk

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By on 24 April, 2015 | Read more by this author

Until more P2P lending websites have a longer record, searching for patterns to improve loan selection is not possible at most of them. But there's one way to select loans that I think will work everywhere.

Keen investors like to scour through past loans to try and find patterns that help them select lower-risk loans.

You might find, just for example, that loans that are being paid on time and have been running for at least six months on one P2P lending website have a far lower chance of going bad.

So if you can buy part of that loan from another lender without paying a premium, you will have invested at lower risk than the original investor, but earned yourself the same interest.

Buy 100 such loan parts, and your loss rate will be lower than average and you'll therefore earn more interest after losses.

Which P2P lending companies let you do this?

It's not possible to search for patterns in loans everywhere.

RateSetter, Lending Works, Landbay, Zopa and Wellesley & Co., for example, don't allow you to select your own borrowers and loans.

Instead, they aim to choose well on your behalf and then help you spread your risk across lots of loans very quickly.

But Funding Circle, rebuildingsociety, Proplend, Bondora, Assetz Capital, Money&Co., and the majority of other P2P lending companies, do let you select loans yourself.

The big problem with pattern spotting

The problem is that most peer-to-peer lending companies are too new for you to be able to analyse the loans in this way to spot reliable patterns. Because you need an awful lot of loans in order to be confident that a pattern hasn't emerged by pure chance.

If the total past loans are measured in hundreds rather than many thousands, most patterns you think you see are highly unreliable.

You also need a lot of time to pass, to ensure that any patterns you observe aren't just relevant to the current economic situation.

The one pattern that is always significant

However, there's one sign that I think is always a good one, regardless of which P2P lending websites you like to use.

That is when business or property borrowers are being highly open and transparent about their businesses.

You want to see that your borrowers have provided a great deal of information and that they answer your questions completely. If they appear to talk openly about the risks and other potential downsides, even better.

If owners and directors are willing to be open and provide lots of details, it suggests they are excited and interested about their businesses.

Naturally, some of them will just have the gift of the gab and others won't even realise their views of their businesses are unrealistic. In short, a good number will be blagging it.

But consider the flipside: you must worry about borrowers who provide short descriptions and don't appear to care about letting lenders know what they need to know, and more.

Because those who write nearly nothing about themselves and their businesses are always worrying. There's nothing ambiguous about that lack of information.

It could be sensible to assume that they don't want you to know the nitty gritty or they don't understand it themselves.

This is just one sliver of your lending strategy

Selecting loans based on the quantity and quality of information you're provided won't always work. In fact, it probably won't work too often. But it doesn't have to. It just has to boost your success rate slightly to have an impact.

If the loan selection decreases your bad loans from 1 in 100 to 1 in 110, it's a modest but useful improvement.

If the resulting lower losses from that boost your overall return by 0.5 percentage points per year, you could be £500 better off in ten years on £10,000 of lending.

So this is just one small part of a strategy that still involves spreading your money across many loans – hopefully over 100.

You can always go back and add more loan selection criteria as and when your chosen P2P lending services have a longer and larger history.

Further reading to boost returns while lowering risks:

Get Started With the Safest Peer-to-Peer Lending Websites.

Funding Circle Lending Strategy.

*Commission and impartial research: our service is free to you. We already show dozens of P2P lending companies in our accurate comparison tables and we keep adding more as soon as they provide us with enough details. We receive compensation from Funding Circle, Landbay, Lending Works, RateSetter and Wellesley, and other P2P lending companies not mentioned above when you click through from our website and open accounts with them. We vigorously ensure that this doesn't affect our editorial independence. Read How we earn money fairly with your help.

2 responses to “Simple Way To Improve Loan Selection & Lower Risk”

  1. David Quine says:

    Wanting to know if I can open an ISA that will allow me to invest in multiple p2p sites to reduce risk or do I have to choose just one lender ?

    • Neil Faulkner says:

      Hi David

      There are no such ISAs available yet, but we are talking to 3 businesses that are in the process of setting such ISAs up. At least two of those businesses are in advanced talks with many major platforms and it looks like they will successfully arrange deals to include them. One of those two businesses appears to be particularly advanced in the background ready for launch technologically and in terms of getting regulatory approval. I’m afraid I can’t tell you their names yet as I have been told in confidence, but we shall let 4thWay users know as soon as these services launch. It might help if you subscribe to our newsletter 🙂

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Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers two “bonds”, one of which is available as an ISA.

Unlike its P2P lending service, neither of these bonds allows you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

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Why are Orchard’s interest rates different?

Orchard’s lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Orchard’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Got it

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Why are Wellesley’s interest rates different?

Wellesley’s P2P lending rates appear higher on its own website than on 4thWay®.

This is because we calculate Wellesley’s interest rates the same way most other P2P lending websites do. We do this so that you can compare the rates more easily and so that they show a more accurate picture of what you’ll earn.

Important information before you visit Wellesley & Co.

Wellesley & Co. is primarily a P2P lending website.

But, when you visit the Wellesley website, you’ll see that it also offers “bonds”. Unlike its P2P lending service, its bonds don’t allow you to lend directly to 100+ borrowers.

Instead, you lend to Wellesley and it lends to other borrowers.

We have not risk-rated either of those bonds, but we expect that their structure makes them more risky, particularly because you’re lending to just one borrower.

Got it

×
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