About LEND’s 4thWay PLUS Rating And Further Key Information

By Neil Faulkner, 4thWay Head of Research on 7th September, 2022 | Read more by this author

Before you read on, you need minimum CHF 500 (€505) per loan. If you want to lend automatically (i.e. without choosing loans yourself) you'll need CHF 40,000 (€40,800).

What does LEND do?

LEND* offers loans to borrowers in Switzerland usually fixed for one year to six years. It mostly does unsecured personal loans and business loans, repaid monthly, and some real-property loans for a variety of purposes that are repaid at the end.

The property loans can be either senior loans or junior to one or two other loans, meaning you're not always repaid first if the loan turns bad and the property needs to be forcibly sold.

To lend through LEND, you can be a citizen of, or resident in, a very large number of countries.

LEND has completed CHF 371 million (€379 million) since 2016.

About LEND's 4thWay PLUS Rating

LEND has earned the 1/3 Discovery 4thWay PLUS Rating. Remember, any rating is good, except 0/3.

We don't receive the data we need to conduct stress tests to see what would happen to lending performance in a severe recession or property crash, which is how a lending account can potentially earn our top rating.

However, the aggregated statistics and information we get is sufficient enough to show that it would likely get the 3/3 Exceptional 4thWay PLUS Rating – if LEND were to provide plausible, complete data and access that supported its claims.

It's annual payout after bad debt is probably going to be in the region of 4.48% during reasonably smooth economies – although expect variations. There's also probably quite a lot of cover in the event of an economic downturn.

History has taught us that peer-to-peer lending companies that provide the level of transparency that LEND does – combined with passing some of our background checks – are still more likely to do better for lenders, on average, than companies that provide less key information.

About LEND's 4thWay Risk Score

LEND can't earn a 4thWay Risk Score, as it doesn't provide the full data we need for our stress tests. We estimate that, if we had the data and it supported LEND's statistics and claims, the risk level would achieve a 4thWay Risk Score of 5/10.

To explain that scale, lower is better, with 1/10 being the same risk of sudden loss in bank accounts (which is obviously lower than any P2P lending account available). 10/10 being absurdly risky. 7/10 is roughly the same risk of making a substantial loss on the stock market.

So the indications are that LEND sits well on the risk scale, possibly in line with many quality providers in Europe.

At this stage, for LEND, we can only loosely estimate that losses before interest in a severe recession and property crash might be above 5% but probably somewhat below 10% of the total amount lent, by the time all the loans are repaid. If this is the case, interest paid to you by borrowers over the life of the loans is likely to exceed any losses.

More about the loans

Since we don't get detailed data, it's arguably even more important to understand the type of lending you're doing.

To that end, I just want to point out some details that you might keep in mind when choosing loans through LEND. These are the details that you won't pick up on if you rely solely on information on the LEND website.

About your security in LEND loans

LEND uses the word “security” on some business loans, when it isn't always technically security.

What is security, normally?

There are two most common kinds of security in money lending.

The first is security on hard assets that have been properly valued, such as real property. A loan used to buy your home is a good example. If the borrower wants to sell the property, the proceeds must be used to pay off the loan. The property will usually retain enough value over the course of the loan to be able to cover the outstanding debt, if necessary.

The second common type of security is in the form of so-called “fixed-and-floating charges” and this is common in business lending. In practice, the borrower is usually able to use up, or wear out, most of this security, which could be cash, machinery, equipment and so on.

In real life, a company that goes out of business often doesn't have much of anything left to sell and pay off debts with. So this second type of security is less convincing. Indeed, it's weak enough that, without specific data from a P2P lending provider to the contrary, 4thWay conservatively treats such loans as unsecured…

…Introduction to security over. Now we get to LEND. While it does take security like those mentioned above, LEND also calls other things security, when it really isn't.

For example, when a business is a sole trader (e.g. a person like a freelancer who hasn't set up a separate entity to run their business, such as a Limited or a GmbH), that businessperson is personally liable with their own home (if they have one), and with their cash and other assets (other property).

But that is a long, long way from being actual security. It's not possible to measure the value of this protection without enough detailed data from LEND, which is probably impossible to supply, even if it wanted to.

Many other P2P lending providers offer the same, but they don't normally come close to calling it “security”. At best, they arrange it as a “personal guarantee” from the borrower, which, again, you require solid data from the P2P provider before assigning any level of value to it.

Where are you in line for getting bad debts back?

LEND also does a fair bit of lending on real property, which certainly is security. But it's important here to understand the details.

Real-property loans through LEND can be rental properties that may or may not be currently rented out, perhaps partly for renovation, or for a holiday home, or a short-term loan called a bridging loan, or for properties bought for trading for a profit. And many other reasons.

With LEND, you're not always first in line to get your money back if those properties are forcibly sold. A bank – or maybe more than one – could rank above you, and the total lent to the borrower might hit 90% of the valuation.

The terms are usually much better than that for lenders. But it does mean that, with a fall in property prices, you could lose a lot more money on a loan than you expected when the property is forcibly sold.

Insurance to cover the loan repayments if the borrower can't pay

Payment protection insurance pays out for 12 months when a borrower is unable to pay due to accident, illness or unemployment. It can also pay off the debt if a borrower dies. Many of LEND's borrowers have this insurance, which might help lenders, too.

Again, LEND loosely uses the word “security” to describe this insurance, but it isn't a form of security. (Technically, it's called a “credit enhancement”.) More importantly than this wordplay – you need to understand its limitations.

When I worked in insurance, I built up a rare specialism in understanding whether each type of insurance product is worth the price paid for it, and also learned to understand the small print that prevent payouts (so-called “exclusions”). In Germany, Switzerland, the UK and probably all other countries, this particular form of insurance has continued to be a disappointment for many beneficiaries up to the present day.

I've read the insurance contract that borrowers take out through LEND. It's my opinion that the exclusions are extensive – as usual – and so I don't currently expect it to pay out very often.

LEND claims that this insurance “considerably reduces the risk of non-payment”. I've heard this many times before. If it wants us to believe it, it will need to back that up with clear, plausible data. Until then, I will assume the insurance has limited value in covering the risk of borrowers being unable to pay.

Security and insurance aren't your main defence at LEND – loan quality is

Now, none of the above on security and insurance should unduly worry you. It's not about being a cause for concern. It's about you understanding what type of lending you're doing. This is so that you can better assess it and so you understand what's happening when any of your loans turn bad.

For many of LEND's loans – specifically LEND's – it's not likely to be the security or insurance that keeps lending losses low. Rather, it's likely to be the quality of the borrowers.

In this regard, it's perfectly acceptable that security is not always the best or even that most loans have security. Your defence against losses is rather to spread your money across lots of loans.

The (admittedly quite limited) evidence available to us indicates that these are likely to be lower-risk loans for their type, with high-quality borrowers. The bad-debt level is quite moderate for these kinds of loans. Although those are indications only, based on the information we have.

Automated lending and how easy it is to lend

We don't know how easy it is to spread your money around into enough loans and it's tricky to estimate how many loans you should lend in without more data. My educated guess is that you should aim at the very least to spread across many, many dozens of loans. As usual, the more, the better.

I expect the automated lending account will enable you to spread across around 50 loans by the time it's deployed all your cash.

Picking loans yourself

For these kinds of loans and the interest rates paid, and for the high minimum per loan, LEND really needs to demonstrate that either there is low variability in results between lenders, or that you can easily lend across lots of loans quickly, so that you can reduce the chance of making a loss through sheer bad luck.

LEND is clearly overwhelmingly targeting the absolute best borrowers, even with some of its borrowers that it grades worse than A+ or A. This should mean the difference in results between individual lenders is relatively low, but that's just indicative and not established fact.

Therefore, spreading across as many loans as possible should be your priority, over-and-above trying to pick the best loans.

It appears that there are usually some open loans available to lend in, so that, with effort, you could usually spread your money across dozens of loans well inside six months.

Early exit

LEND doesn't enable you to sell your loans early when you're lending directly or using its auto-lend account, so you need to wait for your borrowers to repay naturally, along with the interest due.

That is often a blessing in disguise, as lending until borrowers repay is usually a sensible strategy.

LEND does however offer actively managed certificates through a partner company. Basically, these certificates pile money from people like you into a special company set up solely for the purpose of money lending. This way, you lend in LEND loans and perhaps other loans. These certificates allow you to sell your holdings back to it – provided its cash buffers remain sufficient to pay you back.

These certificates are currently outside 4thWay's remit, but please make sure in particular that any fees and charges are very clear, and worth it, because those costs will be on top of LEND's own take of the profits.

Also, check the terms for exiting the loans. The price of your loans might not be fixed, which would mean you might have to sell at a discount.

Currency risk

If your normal currency isn't the Swiss franc (CHF), your rewards of lending are impacted by changes in the exchange rate. These changes will boost or reduce your returns. See The 12 Key Peer-To-Peer Lending Risks for ways to minimise currency risk.

(The certificates I mentioned in the previous section also allow you to invest in the loans in euros or US dollars, rather than Swiss francs.)

Governance, regulation and lending structure

Switzerland has a good reputation for corporate governance. In short, this means the steps it takes to ensure companies are run well, legally, and to the benefit of all.

When it comes to actual regulation for you lending your money, LEND is only really monitored for anti-money-laundering reasons. It’ll likely have to grow a lot more before any more serious supervision occurs. In particular, it will need to be holding a lot of lender money in cash for over 60 days at a time.

Our investigations conclude that the legal contracts mean you're doing pure P2P lending. So if LEND goes out of business, the individual borrowers still owe you, and not LEND. You purchase a claim on the contract made between LEND and a borrower through an assignment agreement. This is one of the most common ways to create P2P lending contracts, making it less likely to create legal problems for you.

Visit LEND*.

Pages linked to above:

The 12 Key Peer-To-Peer Lending Risks.