Warning: We are not currently in “normal market conditions”: as a result of COVID-19, there's a supply/demand imbalance and many lenders will only allow access to your funds slowly if at all. It also remains to be seen how each lender's underlying loans will perform. Proceed with extreme caution until this situation is resolved and things are clearer.
There seem to be new peer-to-peer platforms appearing all the time, but very few of them catch my attention. Loanpad grabbed me right away – because it's offering something genuinely new and much-needed.
So how is Loanpad working out for me, and should you get involved too? My Loanpad review will tell you everything you need to know…
Remember: peer-to-peer lending involves risk. I've not hammered home the risk point in this article because it's covered in my main peer-to-peer lending article. Make sure you read that before investing if you're not familiar with how peer-to-peer lending works and what the risks are.
What makes Loanpad different?
Loanpad is unique among peer-to-peer lenders in offering such low loan-to-value loans.
Looking at their current loan book, the average loan-to-value is under 32% – with no loan being higher than 47%, and some as low as 6%!
This is a big deal, because it means the property that the loan is secured against would need to fall in value dramatically before Loanpad investors lost any money. In the case of a loan with an average loan-to-value of 32%, it would have to lose two thirds of its value before investors had something to worry about.
Loanpad achieves this by partnering with a well-established property lender who originates the loan, then sells the least risky slice of it to Loanpad.
So rather than just having the borrower's equity as a cushion, Loanpad also has their lending partner's share. This drastically reduces the risk for Loanpad's investors.
Who does Loanpad lend to?
Loanpad makes short-term loans (3 to 18 months) for the purpose of property development, bridging or business funding.
Glancing at some of the details of loans live on the platform, they seem to be for pretty standard purposes like funding refurbishment and tiding borrowers over while already-refurbished properties are marketed for sale.
The average loan size is £151,000, and the average value of the security taken is £636,000. These are small numbers in the realms of property development, which I like: they're not funding big, complex, lengthy projects where there's far more that can go wrong.
What are the investment options?
There are two different account types you can choose between:
- “Classic”, paying 4% per year and allowing you to take your money out without giving notice.
- “Premium”, paying 5% but requiring you to give 60 days' notice if you want to pull money out.
Both accounts expose you to exactly the same loans: the only difference is the interest rate and the amount of notice needed to get your money out.
You can split the money you put into Loanpad between these two accounts in any proportion you want. You can also invest in both accounts through a peer-to-peer ISA.
Whichever option you choose, you get interest applied to your account daily rather than monthly. I don't really see what the point of this is, but why not eh?
It's important to be aware that you can only take your money out if there's someone else willing to take your place. If investors lose faith in Loanpad or in the peer-to-peer sector in general, you might not be able to access your money even in the “Classic” account. It isn't likely, but in the worst case you might be unable to access your money until the underlying loans repay.
Do you get to choose which loans to invest in?
No: when you invest with Loanpad, your money gets split equally between every active loan on the platform for maximum diversification. You can't choose particular loans to invest in.
Being a lazy sort, I like this: I'd far rather not bother picking loans, and believe that spreading bets will always be a safer strategy than relying on my own genius.
This is all rebalanced cleverly on a daily basis. So if there were 20 loans on the platform, you'd have 5% of your total funds in each. If a 21st loan comes on yesterday, everything will be jigged around so you get exposure to the new loan and now have an equal 4.76% in each.
As the platform grows, your diversification will keep increasing – which is great.
What protection is in place?
There's all the normal stuff you'd expect from any platform (like security over property, and personal guarantees where appropriate), but also an “interest cover fund”.
This is a separate pot of money that Loanpad maintains for making interest payments if the borrower doesn't. If an interest payment is late, in theory the fund will make sure investors get paid on time while they chase the borrower for payment behind the scenes.
In practice this isn't guaranteed, but at the time of writing a bit of back-of-napkin maths suggests that the fund is big enough to cover two interest payments from every loan that's currently outstanding. Given that you're only likely to have a very small number in arrears at any one time, that seems like a reasonable margin of safety.
What information do you see about each loan?
For every individual loan, you get to see a simple one-page summary covering:
- The address of the security property
- The size of the total loan
- How much Loanpad is putting in
- How much the lending partner is putting in
- When the loan is due to repay
- The value of the security taken
- What the purpose of the loan is
- Details of the solicitors and valuers involved
This is far less information than you get with the likes of Kuflink, who provide the full valuation report. But I think that's fair enough: the risk in each individual loan is lower, and you're not actually using this document to make decisions because you're automatically diversified across all loans anyway.
What I like about Loanpad
I've already covered this, but it bears repeating because it's the biggest strength of Loanpad. The low loan-to-value of the loans de-risks them significantly – although that doesn't make them immune to problems like missed interest payments, and it could still take a long time to sell a property if it needs to be repossessed.
Quick and easy to lend
At the moment, Loanpad puts your funds to work within a day – and the only choice you need to make is whether to invest in the Classic or Premium account (or a mix of both).
As such, you can set up and fund your account in a couple of minutes, and be earning interest the next day.
It's worth noting that you need to fund your Loanpad account using a bank transfer rather than a credit or debit card, but I don't see that as a big deal.
Diversification across all loans
As I've said before, diversification is the best protection – so having your funds split between every loan is a good thing. As the platform grows, this diversification is only going to increase.
Relatively non-risky loans
All lending involves risk, but the nature of Loanpad's loans (small-ish projects for short-ish durations) removes a lot of risk compared to big, complex, lengthy projects.
Deep property experience
Even though Loanpad is a new platform, the loans are all originated by a principal lender which has been around since 1980 – and is still operated by the two founders nearly 40 years later!
This gives me a lot of confidence, because this experienced lender takes responsibility for underwriting and monitoring – which are the critical pieces where platforms can (and do) sometimes fall down.
The founder of Loanpad itself is an experienced property lawyer, which again gives me a lot of confidence: someone who's been party to a large number of different transactions will be well placed to provide a secondary level of due diligence.
What I don't like
It's a young platform
At the time of writing, the platform is under a year old so there's not enough of a track record to draw any conclusions from. Normally this would be enough for me to want to wait and see, but because of the team's property-related experience I'm less concerned.
Security properties are generally in the South East
Because their funding partner generally invests within the M25, Loanpad is geographically concentrated in the South East too.
Normally this would put me off, because I believe the South East will fall first and fastest when the next crash inevitably comes. However, because the loan-to-value of the loans is so low and the funding partner has been through two crashes, I'm comfortable with this.
It's also possible that Loanpad will add further funding partners to get more geographical diversification in the future.
A gripe that literally no-one else will care about is that when you sign up, you have to give a password that includes an uppercase letter, lowercase letter and a symbol…but can't be longer than 20 characters.
Given that they clearly care about security by making you choose a strong password, I don't understand why they'd then limit its strength by enforcing a maximum number of characters. It's something lots of sites do and not a big deal, but I always mention it because it's a weird bugbear of mine.
The other small nitpick is that while you can automatically re-invest the interest you receive (which is great), you can only do so in multiples of £10 so you'll normally have some cash sitting around doing nothing. In reality though, the difference this will make to your returns is negligible – and if it makes it easier for them to do all the fancy rebalancing maths, then fair enough.
My experience with Loanpad
I'm pretty new to using Loanpad, but so far I've found the experience extremely simple. Signing up and funding my account took a few minutes, and the interest has been rolling in ever since.
It's the type of investment you can forget about for long periods of time (which I like), but if I want to get a full breakdown of the loans I'm invested in I can see them on my dashboard or download a CSV.
I really like the blend of simplicity and transparency: it's less “black box” than some other platforms, but still doesn't require me to go to the lengths of actually doing anything.
And most importantly, I'm happy with 4-5% returns given the relatively low risk of the loans on offer. Relative to the other platforms out there, I actually think it stacks up extremely well – and it will only start to look better as their loan book increases and they build a longer track record.