How to do your own IFISA due diligence
Before you invest any of your money – in an IFISA or otherwise – it is vital that you take the time to conduct your own due diligence.
Instead, when you invest in P2P loans, you are trusting that the platform in question is well run and properly regulated. The safer the platform, the safer your investment.
So how can you do your own due diligence to minimise the risk of losing money?
Choose a regulated platform
The Financial Conduct Authority (FCA) regulates the P2P sector, and it has been slow to grant full authorisation to all P2P platforms.
In many cases, platforms had to wait at least two years before the FCA felt confident enough to approve their activities. This is not a bad thing – it shows that the FCA takes its responsibilities to consumers very seriously and that it isn’t prepared to rush approval if a platform isn’t ready.
In fact, the only major platform failure of the past year was by Collateral – a firm which had NOT been fully regulated by the FCA.
By choosing a regulated firm, you can be reassured that the platform in question has been properly vetted by financial experts and continues to be checked on a regular basis.
Check the loan book
Every P2P platform maintains a detailed loan book which tracks every loan, the date of repayments, the amount of interest paid, any defaults, and total loan recovery times. In many cases, this loan book is published on the company’s website so anyone can review it at any time.
Prospective investors should always check the loan book to get a sense of the platform’s ongoing default rate. This will give you a sense of how reliable the platform’s borrowers are, and how effectively the P2P lender is able to recover investor funds.
There is no ideal default rate, but generally speaking anything less than two per cent is considered to be good, while a default rate of five per cent or more could be a cause for concern.
Understand the credit process
The credit-checking process is a vital component of the P2P sector. Before any borrower can be approved for a loan, they must be able to pass a gruelling creditworthiness test.
The details of these tests will vary from platform to platform, but they might involve a check of their credit history, a valuation of any assets that might be used as collateral against the loan, and a face to face meeting with the borrowers themselves.
P2P platforms pride themselves on their transparency, so if your favourite platform does not detail their credit-checking process online, call or email them to find out more.
If you are not convinced that their process is thorough enough – don’t invest your money with them.
Look for loan security
There are two types of P2P loan – secured loans and unsecured loans.
Secured loans will require the borrower to put up an asset (e.g. property, shares of a business, or even a car collection) which could be resold to cover the cost of the loan if they are unable to pay it back within the allotted time. These loans are viewed as being more favourable to P2P investors, as the collateral effectively adds another layer of protection.
By contrast, unsecured loans do not tend to be backed by assets, making them slightly higher risk. However, to counteract the risk of an unsecured loan, most platforms will simply enhance their credit-checking process and make the borrower selection process extremely competitive.
How easily can you divest?
If you lose faith in your P2P platform, or simply find a better IFISA deal elsewhere, you may want to withdraw your money and invest it elsewhere.
However, this is not always as easy as it sounds. Most P2P loans are repaid over a year or more, and some platforms impose hefty fees if you want to withdraw your money early.
As a way of offering more liquidity to investors, many platforms have launched a ‘secondary market’ where P2P lenders can sell loans or loan parts directly to other lenders.
This means that people can invest with the knowledge that they can exit their investment at any given point. However, there is always a risk that you could lose money on the secondary market, if supply is greater than demand.
It may also take some time to sell off your existing loans, as well as introducing further complexity to the investment.
Updated: Thursday, September 27th, 2018