Peer-to-peer lending involves risks
As with any form of investment, there are inherent risks and it is important you understand these risks before you lend. If you don’t understand these risks or are unsure about what they mean for you, we recommend you take advice from an independent financial advisor.
- Your capital and interest are at risk
The main risk that you face as a Lender on the Lendwise Platform is the risk of non-repayment by borrowers, which means that you might not get your capital back or earn the interest you expect, if at all. Our loans are not secured on any assets, which increases your risk of loss if a loan defaults. You can, however, minimise your risk by diversifying your loan portfolio and your investment holdings in general. You can find out more about diversifying your risk below as well as on our Help page.
- P2P loans are illiquid
The loans we offer are illiquid, which in simple terms means that you should not lend money that you may need prior to the maturity of a loan. If a borrower is struggling to repay the loan, the loan term may also be be extended, so it could take longer than you expect to return your capital or receive interest. Whilst Lendwise operates a secondary marketplace where you can potentially sell your loans prior to their maturity, there is no guarantee that you will find a buyer.
- Interest rates may rise, but the interest on your loan won’t
Lenders face interest rate risk, which means that interest rates in the economy could rise but the return on money that you have already invested would remain fixed at a lower level.
- Investing in a P2P loan is not like putting money in a current account
You should not think of an investment on the Lendwise Platform as the same as saving money in a bank account. When you put money in a bank account, there is a very low risk that you would lose your capital. With all P2P loans, your capital and the interest you expect to earn are at risk.
- There is no FSCS cover
It is important for our lenders to be aware that, like all P2P lending platforms, Lendwise is outside of the scope of the Financial Services Compensation Scheme (“FSCS”). This means that, should a P2P platform fail for any reason, those investing (lending) via the platform would not be able to claim compensation from the FSCS.
Funds held in our client money account before they are lent to or after they are repaid by borrowers, are however covered by the FSCS under the deposit scheme. Our client money is held in an account with Lloyds PLC. You will find more details on client money in our Terms and Conditions.
- The risk of the platform failing
As with all businesses, there is a risk that Lendwise will fail or choose to wind down. Should this occur, there is risk that the outstanding loan contracts would not be appropriately managed and administered and you lose certain of your regulatory protections. If we fail or wind down, it could take longer than you expect to receive your investment back. This is because while funds held in our client money account should be returned relatively quickly, funds owed to by borrowers might take longer to recover.
The management of Lendwise has controls and procedures in place, detailed in its Wind Down Plan, to ensure an orderly wind-down of the Lendwise business should we decide that was the most appropriate course of action.
This plan sets out how we aim to return any funds owing to you as soon as practicably possible. This would include returning the money in your Lendwise account (in compliance with FCA Client Money Rules) and the servicing of any outstanding loans you are invested into, until those loans have matured and/or ended.
Understanding the role of Lendwise
Lendwise’s role is to evaluate loan applications that it receives and, following an analysis and selection process, put forward those loans on the platform that it believes, based on its analysis, will reflect the loan capital and interest return schedule for each loan as set out on the Platform. We therefore have a key role in deciding the price or interest rate that the borrower will pay and in turn the interest rate you earn.
In addition to the evaluation and assessment of the loans, Lendwise acts as agent between you (the Lender) and the individual borrowers over the life of the loan. Lendwise will collect repayments and pass on the capital and/or interest received to you (deducting any loan servicing fees that may be applicable).
When a borrower misses a payment (either interest and/or repaying the initial capital amount borrowed), Lendwise will step in and take steps to recover the amounts that are due to the lender but there are no guarantees that Lendwise will be able to recover any amounts not paid or if they are recovered, they are recovered within a timeframe that is acceptable to you.
It is important to understand that Lendwise does not own any of the loans and we therefore can’t guarantee the repayment of your capital or interest.
Why you should diversify your investments on the Lendwise Platform
It is important that you think about what is known as “concentration risk”, which means you consider the risk of “putting all your eggs in one basket”. If you choose to invest in a small number of loans or a single loan, you could lose a higher proportion of the total amount you invest if one of those loans defaults, than if you had spread your investment pot over a larger number of loans. This holds true for all investments, not just P2P loans.
We therefore recommend that you consider spreading your investments over a larger number of investments and over different types of investment.
Lendwise has an auto-lend option that employs software to automatically diversify your funds across a wide range of Lendwise P2P loans. You can set your criteria for the range of loans that you would like to invest in, and Lendwise’s software would then automatically diversify your funds for you across all available loans according to your specified criteria.
