UK peer-to-peer lender Lending Works has just launched its Innovative Finance ISA and is promising an unprecedented level of safety for lenders' money. But does that security come at a price?
Peer-to-peer firm Lending Works has just launched the first mainstream Innovative Finance ISA (IFISA) for the UK market.
The IFISA allows investors to include peer-to-peer (P2P) investments in their annual tax-free ISA allowance for the first time.
While certain niche P2P lenders have already launched IFISAs, including Crowd2Fund and Crowdstacker, Lending Works is the first that allows investors to lend to individuals, giving it a wider appeal.
As the IFISA has been so eagerly-anticipated by investors, this is a big coup for Lending Works, although it's surely only a matter of time before the biggest players – Zopa, Ratesetter and Funding Circle – get clearance to launch their own IFISAs.
In this article, we'll look at how the Lending Works P2P products stack up.
But before we do that, let's look at how this provider works.
How safe is Lending Works?
Launched in 2014, the company claims to go further in ensuring its lenders' money is safe than any of its rivals, emphasising that protecting its lenders' money is “our highest priority”.
To that end, it has devised three levels of protection for those who lend through the site.
First is the underwriting. Borrowers are credit checked with credit reference agency Equifax, as well as undergoing an affordability check, identity check and a check against the CIFAS fruad prevention register.
As well as the underwriting there is also the fact that lenders' money is held within a ring-fenced trust, administered by a not-for-profit firm. The money is completely segregated from the day-to-day operations of Lending Works, meaning that if the firm ever went bust, the lenders' money would be protected.
Finally, there's the Lending Works Shield. This consists of two parts: a reserve fund, protecting borrowers against defaults and fraud, and an insurance policy with a UK-based insurer to cover the impact of extraordinary events, such as a major economic downturn.
The Shield means that lenders are protected even if as much as 10% of their borrowers fall into default.
If you're a lender
Lenders can choose how long they want to lend their money for, with terms running from one year to five years. As is standard practice with peer-to-peer sites, your money is split among a number of different borrowers to lower the impact of any defaults.
You can exit your loan early so long as a new lender can be found to replace you. A fee of 0.6% or £20, whichever is greater, will be charged, while you may also have to cover the change in interest rates from when you initially lent your money.
Lender fees are capped at 1%. All of its interest rate quotes already take that fee into account.
Here are the rates lenders can currently earn over the various terms with Lending Works:
|
Term |
AER |
|
Three years |
3.6% |
|
Five years |
4.5% |
Those are far better than you'll get from any bank savings account over a similar period, though rival peer-to-peer lenders do quote higher returns.
For example a five-year income account with RateSetter will get you 5.4%, while Zopa is offering up to 6.1%.
Of course Lending Works will argue that its main focus is on the safety of its lenders' cash, hence rates that aren't quite market-leading. Plus you can wrap your investments in that lovely tax-free IFISA wrapper!
Check out the current accounts that beat the best savings accounts
If you're a borrower
A £5,000 loan from Lending Works over a three-year term comes with a rate of 6% APR at the moment. But that can still be comfortably beaten by plenty of other providers, as the table below demonstrates.
|
Lender |
APR |
|
3.60% |
|
|
3.60% |
|
|
3.70% |
Get a larger loan from as little as 3%
The cost of safety
Lending Works trumpets that it has gone the extra mile to ensure lender safety, but it's worth noting that its peer-to-peer rivals also have measures in place to protect their lenders.
RateSetter, for example, has its Provision Fund, where borrowers pay a small contribution to a central fund that is there to cover defaults.
Its a model that Lending Works has sensibly followed with its own reserve fund. Similarly Zopa has its Safeguard feature.
And they both manage to offer a better deal to both lenders and borrowers.
Lending Works is a relatively new entrant to the market, so its rates could change other the months to come (perhaps as its rivals launch their own IFISAs).
But it's interesting that it has chosen to focus so much on safety rather than some headline-grabbing interest rate that will likely fall over time.
What do you think? Is the combination of a bank-beating return and extra safety measures a compelling one? Or are you happy to take the risk for a slightly higher return? Let us know your thoughts in the Comments box below.
More on loveMONEY:
What is peer-to-peer (P2P) lending?