Founded in 2014, Lending Works Ltd is a UK peer to peer lending (“P2P”) platform that connects investors with UK consumer borrowers. Investors can lend anything from £10 and automatically diversify their capital across multiple borrowers when they lend through the platform. Investors can choose to auto re-lend their repayments to new borrowers on the platform or take repayments as income. The platform does not offer manual loan selection.
Lending Works prides itself on its ‘Shield’ protection. The Lending Works Shield protects investors from missed repayments through a combination of insurance and a provision fund.
In early 2017, Lending Works launched its Innovative Finance ISA and the platform is a member of the Peer-to-Peer Finance Association (P2PFA).
NB: Statistics are correct at time of publication – 21/08/17
|3 Year||5 Year|
|Investment Term||3 years||5 years|
|Early Access||Fees apply||Fees apply|
Lending Works Review: Withdrawing Funds
To withdraw funds from the 3-year and 5-year products, investors can select to take loan repayments as income for free. To access capital beyond loan repayments, investors must sell their loan commitments on the secondary market. Lending Works charges 0.6% or £20 (whichever is greater) to use this feature and additional charges may apply if there’s an ‘interest rate shortfall’ between the current rate on sale and the rate expected by the substitute investor.
Under normal market conditions, it’s fast and easy to find other investors to buy loan parts on the secondary market. However, it’s important to remember that under adverse market conditions it may take longer to find a buyer, or there may not be anyone willing to buy, which means lenders will be obligated to hold their loans to term.
Lending Works Review: Net Returns
To estimate net returns, Orca has conducted loan by loan cash-flow analysis on every loan originated by Lending Works. Providing the Lending Works Shield continues to protect lenders against defaults, which it has since inception in 2014, investor returns are considered to be stable and predictable.
The chart below plots net returns, calculated by Orca vs. estimated net returns provided by Lending Works. In year 2015, the actual performance of the loan book was poorer than expected – 3.62% – however, the Shield covered all losses so investors’ actual return was as expected – 5.2%.
In 2017, the actual return appears to be higher than the expected return. Loans originated in these years are still in their infancy and so the risk of these loans defaulting later remains significant. Again, as the Shield covers losses, the actual return will likely be close to the estimated return.
Lending Works Review Fig 1. *Analysis conducted on the Orca Platform
Lending Works Review: Default Rates
Lending Works does not publish its expected future default rate but does publish its expected future bad debt rate. The bad debt rate takes account any recovered losses following default.
The actual bad debt rates can be seen to be decreasing from a high of 3.08% in 2014 to 1.02% in 2016 and zero in 2017. As loans are still in circulation and in their infancy they still have the opportunity to default in later years. Loans are most likely to default in the middle of their terms and not in their first years.
In 2015, actual bad debt rates were higher than originally estimated. As the Shield covers all borrower defaults this should not be perceived as a significant risk to lenders. Bad debt rates are, however, something that need to be continually monitored.
Lending Works Review Fig 2.
Lending Works Review: Volumes
The amount a platform lends is important for two principal reasons:
- Credit Modelling: The more a platform lends the more data it has to build its credit processes. Effectively, the more experience a platform has at lending the better it becomes at evaluating credit risk.
- Early Access: To access your money early a new lender/investor must be available on the platform to fulfil your borrower commitment. The more the platform lends, the greater the probability of new lenders.
Lending Works Review Fig 3.
Cumulatively, Lending Works has lent £63m, growing year-on-year since being founded in 2014.
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Lending Works describes the breakdown of its investor base on its website: The majority of lenders on the Lending Works platform are consumer (83%), male (67%), and aged between 50 and 64 (42%).
Lending Works Review Fig 4.
Lending Works Review: Security
The principal risk is a large number of borrowers default on their loan commitments. This may reflect poor economic conditions or Lending Works’ credit decisions.
Diversifying across a wide range of borrowers is the principal method of risk mitigation employed by Lending Works. A reserve fund is maintained at a sufficient level to cover expected arrears and defaults. Another tier of protection comes in the form of insurance, which is backed by three A and B-rated UK insurers. This triple protection constitutes the ‘Lending Works Shield’.
When investing across Lending Works, the maximum exposure a lender will have to a single borrower is 5%. Lending Works employs a three-stage diversification strategy to mitigate risk. The first step is allocating funds to multiple borrowers based on Lending Works’ ‘Fair Algorithm’. All investors then have access to the Lending Works Shield, which compensates investors in the event of borrower default. A back-end stage of diversification, called the ‘Pooling Event’, completes the strategy. This is where all losses are pooled and allocated to investors on a pro-rata basis should the reserve fund and insurance fail to cover losses.
Lending Works Review: Borrowers
The vast majority of loans (99.7%) on the Lending Works platform are personal loans issued for a variety of purposes such as debt consolidation, vehicles and home improvements. Most of the borrowers are aged between 25 and 49.
Lending Works Review Fig 5.
If a borrower is late in making a repayment, the Lending Works Shield will cover the payment, while the recovery process commences. Lending Works will make initial contact with the borrower and if the borrower still fails to pay, a third party debt collector will take steps to recover the debt.
The minimum, maximum and average loan are displayed in the table below.
|Year||Min. Loan Size||Average Loan Size||Max. Loan Size|
The relatively low average loan amounts reflect the prominence of small consumer loans across the Lending Works loan book.
|Min. Borrower Rate||Average Borrower Rate||Max. Borrower Rate|
The annual weighted average borrower rate and minimum borrower rates have remained relatively stable since 2014 and are 4.48% and 3.30% respectively in 2017. The maximum borrower rate in the last three years of 17.4%. 14.9% and 17.2% may appear to be alarmingly high, but reflect small outliers in the data set and not thought of as a risk to investors.
Lending Works Review: Conclusion
Lending Works remains a small platform, but has produced solid, stable returns to investors since the platform was founded in 2014, thanks to the protective Shield. However, there is a trade-off for this security as the platform offers rates of return that may be considered comparatively low versus those offered by other P2P platforms.
It is also important to remember that investment terms on products are 3 year and 5 year, with no free access to your capital earlier than that.