'Safest' peer-to-peer platform just got safer with enhanced insurance to protect lenders against borrower defaults.
Peer-to-peer platform Lending Works says that lending money through the site is now even safer, after it extended the insurance in place to guard against borrower defaults.
Lending Works already has a reserve fund in place to cover defaults, as well as being the first peer-to-peer firm to take out an actual insurance policy to provide further protection.
This policy has now been improved, so that it safeguards lenders’ money against all the major reasons for defaults such as accidents, illness, death and redundancy.
This move means that even in the event of another major market downturn, where loan repayments may be harder to collect and arrears rise, savers’ funds will be protected.
The improved cover is offered by three UK household name insurers, all regulated by the Financial Conduct Authority and Prudential Regulation Authority.
Lending Works says the upgraded protection provides the safest possible peer-to-peer lending environment without impacting interest rates and at no extra cost to lenders or borrowers.
The risks with peer-to-peer
Peer-to-peer platforms offer an alternative way to get a better return on your cash.
They work as financial matchmakers, putting savers willing to lend in touch with borrowers in search of a loan. Because there is no middle man taking a fat cut - in the shape of the banks - each side tends to get a better deal.
However, this method of investing doesn’t come with the same protection that a traditional savings account offers. Investments aren’t covered by the Financial Services Compensation Scheme, which protects up to £85,000 of UK deposits per institution. So when lending through a peer-to-peer website, your capital is at risk.
Peer-to-peer websites encourage you to spread this risk by investing small amounts in different loans, so if a borrower defaults the impact is minimal. And many typically have a reserve fund, built up through fees charged to the borrower, to cover any potential losses.
But Lending Works doesn’t believe this is enough and is the only peer-to-peer lender that also offers a series of insurance policies. It says this is needed as reserve funds may not fully protect against major market movements like another economic downturn.
Equifax research, which looked at the repayment data of two million peer-to-peer personal loans in the UK over the past five years, has revealed that even borrowers with good credit scores have a one in ten chance of missing at least one repayment during the term of their loan.
The evidence also shows that in the event of a major market downturn, relying on a reserve fund alone would require a platform to reserve up to 5% of its loan book in order to protect all of its customers.
The 'safest' peer-to-peer platform?
Lending Works is a relatively new player in the peer-to-peer market, only launching in January earlier this year, but claims it’s the safest around.
[SPOTLIGHT]The firm says it differs because it offers three layers of protection for lenders made up of strict checks on borrowers, ring-fencing money invested and its Lending Works ‘Shield’.
The Lending Works Shield is made up of a reserve fund protecting borrowers from arrears like missed or late payments (typically offered by most peer-to-peer platforms) plus its insurance policy.
What rates can you get with Lending Works?
Lending Works is one of the most competitive peer-to-peer lenders at the moment.
Currently it's offering a rate of up to 4.1% on lending over one to three years or up to 5.5% for lending between four and five years. Right now new investors using the peer-to-peer site can earn up to £50 cashback as well.
These rates can be beaten though. Save for five years with RateSetter and you can get 6%, while over three years you'll get 4.3%, for example.
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