The Attractive Way Loanpad Finds Borrowers Vs The Broker Way
Property peer-to-peer lending sites that use loan brokers or regional managers to attract borrowers always require an extra little bit of attention from 4thWay.
Brokers don't just do the initial assessment of a loan. They are also partly salespeople, selling the loans to banks and peer-to-peer lending sites. If not on a tight leash, they can be incentivised to push borrowers that are low quality in order to earn a high fee. That fee also lowers the interest that can be charged to the borrower and paid out to individual lenders.
So 4thWay's experts look hard at the motivating forces at the P2P lending sites' headquarters, and at their own skills and experience in assessing the loans that are being sold to them.
A bit of background on another way to get borrowers
I've been looking into Loanpad*, which has a third way of getting loans together that is even more attractive. I'll explain how it's attractive shortly, but start with some background.
Loanpad works with another company that is called a “principle lender”. This means that it arranges loans at its own expense, but it will sometimes sell parts of the loans to other lenders.
This partner business is family-run and claims to have been operating for decades. While 4thWay's experts have no leverage over them to interview them personally they certainly appear to have a great deal of experience. This is backed up by official records of their success, with Companies House showing a very long history of profitability and growth.
Loanpad's founder was a property lawyer for 14 years, so he trusts that his contacts there have proven themselves.
The reason this is so attractive is that Loanpad's principle lender is so confident in its abilities that it retains a large chunk of the very riskiest part of the loan.
On average, the total amount lent to borrowers so far has been 79% of the current valuation of the property. However, 44% of the property valuation is lent by the principle lenders, and they take the first loss. This means that Loanpad* lenders are lending just 35% of the property valuation, on average.
Therefore, if a loan goes bad and a property has to be forcibly sold, the loss would have to be over 60% before Loanpad lenders would lose a penny. The principle lenders would typically lose money if the loss was just over 20% and they'd lose half their money if losses were much more than 40%.
Clearly, those principle lenders are very confident about taking on the bigger part of the risk.
No fees involved
There's another advantage for Loanpad lenders. The principle lending partners themselves don’t use brokers and source deals privately, containing the costs. Naturally, they also charge higher interest rates to borrowers for the riskier slice of the loans that they keep, so the “cost” to lenders is in the form of lower interest rates. But still attractive for those incredibly contained risks!
My biggest question
The question I have is: can this method grow as Loanpad grows? Will there be enough loans available from sources like this as more lenders sign up? Loanpad says it has a few very similar partners in mind from the CEO's own list of contacts. He believes that Loanpad will be able to maintain lending at under 50% of property valuations into the future. I hope so. In the meantime, enjoy the low risks available now.
Independent opinion: the opinions expressed are those of the author and not held by 4thWay. 4thWay is not regulated by the ESMA or the FCA, and does not provide personalised advice. The material is for general information and education purposes only and not intended to incite you to lend.
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