PEER-TO-PEER analysis firm 4th Way is urging investors to diversify after stress testing revealed the odds of losing money in a severe recession can be 10 times higher in some cases when lending to just one borrower on a P2P platform.
The research, released on Tuesday, applied international banking stress tests to P2P platforms it assesses such as Zopa, Funding Circle and RateSetter, and found when lending to 100 borrowers, investors have just a 0.1 per cent chance of losing 20 per cent or more of their original money.
The research added that all the losses on bad loans are either partly or completely offset by interest earned over the years on good loans, and by any additional protection in place, such as reserve funds to cover expected bad debts. Re-lending in the years prior to and after the recession further lowers the risk, 4th Way said.
The research also found that those lending to prime buy-to-let mortgage borrowers had a less than one per cent chance of losing money. In contrast, investors lending to either a single prime borrower for a personal loan or to one super-prime business borrower could see the odds of losing most of their money rise to three per cent.
However, when lending to 100 prime individuals or super-prime business borrowers, the risk of losing 10 per cent or more of their total loans was no more than 0.1 per cent.
4th Way also assessed five of the biggest lenders – Zopa, Funding Circle, RateSetter, Assetz Capital and FundingSecure – and found this group has collectively paid out more than £600m of interest versus under £200m in bad debts.
“Lending money to creditworthy business, personal and property borrowers in straightforward loans is an asset class that can be just as stable and reliable for individual investors as it has been for institutional money lenders since at least the invention of credit scores,” Neil Faulkner, managing director of 4thWay, said.
“This is not to say that lenders will only lose money by not diversifying. There will be times when some lenders will do worse despite doing so, especially where they choose to take higher risks.
“But not all investors are taking simple steps to diversify and this is something that the platforms themselves have to take more responsibility for. Information about minimum loans should be made clearer so investors can work out for themselves where to spread their money.”
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