Guest blog: how do P2P lending platforms know your borrowers are good ones?
In this guest post, Neil Faulkner, CEO at 4th Way, the P2P lending ratings agency, looks at the steps that peer-to-peer lending platforms can take to ensure that they're lending to creditworthy borrowers.
P2P lending platforms can get it wrong with one borrower, but when spread across lots of borrowers it is possible to be super accurate with the right processes and checks.
Not all platforms have the relevant finance experience to assess borrowers correctly - and this shows in their results. But the platforms with experience, and the right structures and discipline to encourage sensible lending, use tried-and-tested processes for approving loans.
With regards to personal loans, these are the sorts of processes you should expect to see:
Checks to see if the borrower is likely to have the income and financial position to be able to afford repayments. Borrowers are often required to provide bank statements, which reveal a lot about salary, affordability and how well money is managed. Bank statements might also show whether a borrower neglected to mention a debt. If not enough salary information is available on bank statements, a borrower might be required to provide payslips.
Check to see how substantial the borrower’s debt history is. Ironically, borrowers who have never taken on any debt can be less attractive since they haven’t built up a good track record.
Checks to see how well the borrower met debt repayments in the past, and whether the repayments were punctual.
Checks to see whether the borrower became bankrupt or insolvent.
Identity and fraud checks, including validating name and address on the electoral roll. You might really expect the platform to be a member of CIFAS, so that it receives information on both fraud by a potential borrower or against that potential borrower. Additional checks may be required in some circumstances, such as checking copies of a driving licence or utility bill.
Checks on how many other loan applications the borrower has made in a short period.
Checks on who the borrower has joint debts with.
Ideally you want to see that the P2P lending site uses a credit-reference agency that you recognise by name without having to look it up - or even two agencies. It is from these agencies that they will get most of the information they need in the list above, including CIFAS information if they are CIFAS members. If you don’t recognise the name of the credit-reference agency, these fraud checks might not be incorporated, so look for separate checks too.
Next, the P2P lending platform will process all the information into scores, perhaps an affordability and trustworthiness score. These help assess whether the borrower can afford the additional debt and also indicate what interest rate to offer if the borrower is accepted.
For some P2P lending sites, those scores will also indicate how much money should be put into a reserve fund to cover potential losses.
Competent P2P lending sites conduct other processes. Those offering personal loans will have risk specialists (such as we do at 4thWay to analyse how well the P2P platforms are doing). Risk specialists analyse the behaviour of loans from start to finish, looking for weaknesses and ways to make improvements to their approval processes. Platforms also have processes for collecting payments, and chasing and enforcing bad debt debts.
So watch out that consumer loans P2P lending websites you’re interested in are using processes like these.
Neil Faulkner is CEO of 4th Way, the P2P lending ratings agency
A note from RateSetter: our underwriters do all the above and more - you can read about some of our own processes in our blog on What happens when we check your credit score.