John Butler, chief executive of Lend & Borrow Trust Company, explains how an innovative type of secured peer-to-peer lending could provide greater reassurance in a downturn…
THE RAPID GROWTH of peer-to-peer lending in recent years has been nothing short of astonishing, with new platforms being launched regularly. The UK’s largest P2P platforms have cumulatively lent out more than £11bn. While still regarded as an ‘alternative investment’ by many, it is worth remembering that lending out one’s savings is the most fundamental of all financial activities, one that is documented in some of the oldest stone, clay and papyrus texts ever discovered. P2P is simply a modern, elegant technical solution to facilitate this ancient way of putting your money to work.
For all its technical elegance, however, there is a darkening cloud hanging over the P2P industry: It is yet to be tested during a major credit cycle downturn or a financial crisis. No one really knows what future default rates on P2P platforms might be and, thus, whether current returns are high enough to compensate lenders for the losses they might incur in the next economic bust.
Fortunately, the P2P industry is adapting and diversifying as it grows, with a number of firms making inroads into collateralised lending. This is particularly common with property, but also auto and receivables finance. Secured lending provides a higher degree of certainty that the lender will be repaid, at least in part, in the event of default. However, there are limits to what protection conventional collateral, including property, can provide in a sharp downturn if the collateral values themselves decline.
There is also the problem of liquidity. Even if collateral values do not decline significantly it can take time to liquidate property or other relatively illiquid assets, resulting in long delays in returning the recoverable portion of a lender’s capital. For banks and other large institutions, managing a book of defaulted loan collateral is not problematic, although there are costs involved in doing so. But for a lender on a P2P platform, the myriad legal and administrative costs to collect on a defaulted, collateralised loan are likely to be higher.
It is precisely this potential problem that Lend & Borrow Trust Company (LBT) is designed to solve with our unique secured lending model. Rather than lend against property or other collateral that tends to lose value in a downturn and involves time and friction to liquefy, all loans on our platform are fully secured by gold and silver, which can be sold immediately if the borrower defaults.
While precious metal prices can fluctuate, they trend higher over time. Nevertheless, all loans arranged through LBT have collateral equal to at least 133 per cent of the total loan value, implying a high degree of security. Most important, however, the precious metals market is highly liquid and continues to function smoothly even during the most severe of financial crises, such as the one in 2008. Thus, lenders can enjoy enhanced returns while also increasing the certainty of repayment with loans collateralised by gold and silver to mitigate their credit and liquidity risks.
Many households and businesses own gold or silver bullion they are prepared to use as collateral. A number of these have already chosen to borrow against their metal through LBT. Our lenders are individuals and institutions who see value in receiving interest secured by collateral, at rates which are often in excess of those offered by government bonds, bank deposits, or other comparable low-risk alternatives. Thus our innovative platform provides unique benefits for borrowers and lenders alike.
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