SUMMARY: Lending Works is a relatively new player to the P2P-backed personal loans sector and looks to take on established players Ratesetter and Zopa. Interest rates used to be good here, but have been reduced with a retrospective application on past loans, and a repetition of this cannot be ruled out in future.
Here is how Lending Works compares to my other investments:
|Platform||Link||Target Rate (%)||My XIRR (%)||Status||Live Rating|
NOVEMBER 2019 UPDATE: A bit of a bombshell as interest rates are reduced. Loses one star.
OCTOBER 2019 UPDATE: No change.
SEPTEMBER 2019 UPDATE: Queues for the 5-year product have gotten a little longer this month, resulting in greater cash drag.
AUGUST 2019 UPDATE: A small change as the 1-year and 5-year products are renamed ‘Access’ and ‘Growth’.
JUNE 2019 UPDATE: No change.
MAY 2019 UPDATE: No change.
APRIL 2019 UPDATE: Seems to be business as normal here.
MARCH 2019 UPDATE: The queue status seems to have been resolved and wait times are back to normal.
FEBRUARY 2019: New investments have quite a long queue, and the predicted queue time has been removed. Hopefully resolved next month.
What is Lending Works?
Lending Works was set up in 2014, and much like other latecomers, they were able to survey the market and correct what had gone wrong for other platforms. Their focus in originating loans differs slightly, in targeting not only personal loans but also retail finance. This allows the end customer to spread payments for a purchase across a longer time period, effectively inserting Lending Works into a transaction at very little cost.
The platform has taken some of the best features from its competitors and aimed to improve upon them. From an investor point of view, interest rates are fixed and not floating (unlike Ratesetter), but this gives a higher rate in the vast majority of cases. Investors are also covered by a provision fund which also benefits from insurance which covers missed payments in the event of sickness, unemployment or death.
This translates into quite a simple platform to use, with few options on how to invest your money. Which is not always a bad thing.
Here is a table showing Lending Works features:
|Investment Type||Personal Loans|
0.6% for sell-out
|Available in ISA?||Yes|
|Active on forum?||Yes|
Sign Up Offer
There are no sign-up offers at present.
Alternatives to Lending Works
Lending Works Operating Model
This is straightforward: Lending Works make their cash by simply offering investors a smaller interest rate than they can charge borrowers. At a typical APR of 12.9%, there seems to be plenty of room here, and the question becomes whether quality origination of loans can continue.
From an investor point of view, this is straightforward. Signing-up process is easy, and you can deposit money into your account by either debit card or bank transfer. Then you can access the loans. There is not too much choice, as there are only 2 markets: the 3-year and the 5-year, paying 5.0% and 6.5% respectively at the time of writing. This can change, but in practice has been stable for some time.
In August 2019, this model changed a little and these markets changed names to ‘Access’ and ‘Growth’, both investing in loan contracts of length 2 to 60 months. The interest rate differential has stayed the same for the moment (5.0/6.5%) but Growth has a 0.5% early access charge.
At the end of November 2019, interest rates declined massively, and the Access product now pays 3.8% and Growth 5.4%. Even worse, this interest rate applies retrospectively across all past loans. Until January 2020, fees to liquidate investments are waived.
Repayments operate in much the same way as Ratesetter: loans are amortising so you will be repaid a portion of capital and interest monthly. It is possible for your loan contracts to be numerous so there is no specific date in the month where interest is credited. On repayment, you have the choice of whether to reinvest automatically or withdraw to your cash account. The difference between the two is that automatically reinvested repayments have priority over new money, which in theory reduces cash drag.
It is possible to sell your investment early (subject to a fee of 0.6%), and it is also possible to hold your investment within an ISA.
How are funds protected?
Lending Works offer a series of initiatives to protect investors money. The most relevant of these is the Lending Works Shield, which consists of a traditional Provision Fund as well as a series of insurance policies. These work quietly in the background and activate instantly: the fund pays first and then attempts to recover the money using other methods after (this works the other way around at other platforms such as Lendy).
The effect for investors is obvious: a seamless payment. On the downside, there is a lack of transparency here compared to Ratesetter, we don’t know the exact amount the fund contains, for example.
Lending Works also cite meticulous underwriting as a protection of cash, but we feel this should be standard across all platforms anyway.
Pros of Lending Works
There are many things to like about Lending Works:
Unblemished track record: Since inception Lending Works has run very smoothly and has been strong and stable for investors. A look at its statistics page shows that defaults have been low.
High Interest Rates: The interest rates on offer are higher than Ratesetter for the majority of the time, and higher than Zopa for all the time.
Provision Fund: The provision fund seems better than other offerings, also insurance policies also help conserve cash in the fund.
Low Maintenance: With the auto-invest option on, this genuinely does become a low-maintenance account which you rarely have to check. This is unlike Ratesetter, as there you could inadvertently end up taking a artificially low interest rates if you are unlucky with the timing of the repayments.
Cons of Lending Works
There are also a few things to bear in mind before investing here:
High Cash Drag: There are some signs that Lending Works may be a victim of its own success. Because repayments have priority over new money, a new investment may take some time to invest – queues of a month or more are not uncommon recently.
Fixed Interest Rates: Interest rates are fixed, which means that in the short-term at least you may be better off going with Ratesetter if market conditions dictate so.
Uncertainty on Provision Fund: The statistics page revealed that in 2017 the total payments covered by the Shield dipped below 100%. Coverage is never guaranteed, so this may result in losses especially if economic conditions are adverse.
Platform Stability: There is scant information about the platform itself, and the alternatives Zopa and Ratesetter have better standing and ability to withstand losses.
My Lending Works Investment Strategy
The lack of real options in investment leads there to be very few actual strategies and much will depend on your own goals. The only option I have chosen is to let repayments hit the cash account rather than be automatically reinvested. This allows a greater degree of flexibility should the rates change in the short-term.
There is no due diligence to do on any loans, and you do not get to see any information about who you have lent to outside of the basics of the loan contract.
Currently I class Lending Works as a very good platform. High interest rates combined with low defaults and responsible management have made this a good experience so far. As a pure investment it is far superior to Zopa (which has lower rates and no provision fund) although I would regard platform risk as slightly lower there. There are signs that perhaps demand exceeds supply, so it will be interesting to see how the proposition evolves going forward.
Disclaimer: This article represents my own opinions and should not be substituted for investment advice. Please research before you invest with any firm. Typically P2P investments are not covered by the Financial Services Compensation Scheme (FSCS) in the way bank deposits are, and there are no guarantees that you will receive the returns advertised (or even a return at all)