Buyer beware: Easy-access P2P accounts may have hidden risks
EASY-ACCESS accounts are less lucrative and riskier for peer-to-peer investors, new research claims.
A number of P2P platforms offer easy- or free-access accounts, which attract investors who want the option to withdraw their money swiftly. However, lenders who choose these accounts earn nearly two per cent less interest per year and early access is not guaranteed, warns 4th Way.
The independent P2P research and ratings firm found that the average interest rate on accounts that offer free early access is 3.16 per cent, while the average rate on other P2P accounts is 4.91 per cent – a 1.76 per cent increase.
And the average early-exit fee on standard P2P accounts is just 0.48 per cent, which means that the higher interest on these accounts easily covers the exit fees, 4th Way argues.
Furthermore, the ability of P2P lenders to withstand losses on their easy-access products is lower than it is on their higher-paying, longer-term accounts, according to 4thWay’s stress tests, which use a more conservative form of the international Basel standards used by banks.
While the loans on both types of accounts tend to have the same risk profiles, the interest rates are lower for easy access, giving platforms a smaller cushion if reserve funds are depleted and default rates rise.
As a result, 4th Way has given slightly lower ratings to some easy-access accounts due to its perception of higher risks.
Investors hoping to get their money back swiftly by signing up to an easy-access account may be disappointed during times of crisis. Unlike savings accounts, P2P platforms cannot guarantee that individuals can withdraw their money whenever they want.
In the case of a recession, bad debts will rise and the volume of new money coming in to the platforms will fall, making it more difficult for lenders to sell their loans due to an imbalance in supply and demand, 4th Way claims.
“Up until now, for the most part, lenders have had no difficulty leaving within minutes or at most days of requesting early access, regardless of whether they were using longer-term lending accounts or accounts billed as easy access,” said Neil Faulkner, co-founder and managing director of 4thWay.
“Most of the major P2P sites currently have excellent controls, teams and processes and, so long as they continue to have high standards, I expect that the vast majority of lenders who are unable to exit immediately during a severe crisis will not lose money – regardless of the type of accounts they are lending through.”
However, Faulkner added that it may be wiser for investors to choose longer-term accounts over easy access, with a view to paying the modest early-exit fees if they want to withdraw their money early, rather than losing out on a substantial amount of interest.
“Lenders should also note that they usually get repaid some of their loans every month, and that if they stop re-lending their repayments, they can generally expect to have around half their money back within 18 months, with no exit fees,” he said.