Saturday, 8 August 2015

The Lending Works Experiment

A little over a year ago I cried enough of the derisory instant savings account interest rates that were being offered by the banking sector, which after inflation and taxes, meant the value of my wealth was going backwards.  A quick trip over to Money Saving Expert reveals that the problem still exists.   The market-leading rate if you want instant access to your money is 1.6% meaning a higher rate tax punter, after inflation of 1.0%, is going backwards by 0.04% annually.  Additionally, this rate then reverts to 1.1% after a year meaning you have to do the savings account dance all again.  Even the best 3-year fixed rate account is only offering 2.65% meaning after inflation of 1.0% and higher rate tax our punter would only be getting ahead by 0.59%.  The chart below shows it’s been like this for a long time now and with no sign of an up-turn.

Average UK Savings Account Interest Rates
Click to enlarge, Average UK Savings Account Interest Rates

Meanwhile, while this has all been occurring I’ve been quietly shifting/building wealth with peer to peer (P2P) lending (while of course acknowledging that P2P has a different risk profile to bank savings accounts) as an alternative to a bank savings account.  Today I have as much money invested in P2P, £43,000, as I do in savings accounts.  Since starting out in May 2014 I’ve earned interest/bonuses of £1,342 which after taking into account deposits/transfers occurring over time is an annualised 4.3%.

Given my successes so far with P2P my interest was piqued this week when I was contacted by Lending Works enquiring whether there was any opportunity for us to work together.  At the time I wasn't using Lending Works as a P2P platform but I was aware of them as I know weenie over at Quietly Saving has money in their platform.  A few emails later we had agreed that rather than something like a boring advertisement that would add little value to readers I would instead run a published experiment with real money lent into the market.

Full disclosure: The experiment starts with £300.  That £300 has been given to me by Lending Works and is lent under my name.  All interest earned going forwards is also mine.  Additionally what I write below is not vetted or approved by Lending Works.

So with £300 transferred into my current account and armed with a fresh cup of coffee I signed up to Lending Works this morning.  The application itself was nothing more than a single page online application that took me two and half minutes to complete.  I then direct debited the money into my new lending account which also took me two and half minutes.  Here I was slowed a little by the Verified By Visa questions otherwise the process would have been even quicker.  A look at the Rates tab within the portal suggested I could expect interest of 4.8% for lending up to 3 years and 6.4% for lending up to 5 years.

Lending Works Rates Screen
Click to enlarge, Lending Works Rates Screen

Proceeding to the My Lending Offers tab I was asked if I wanted to lend for up to 3 years or up to 5 years.  Interestingly up to 3 years could contain 1, 2 or 3 year loans and up to 5 years could contain 4 or 5 year loans.

Lending Works My Lending Offers Screen
Click to enlarge, Lending Works My Lending Offers Screen

I duly selected up to 3 years at which point I received the screen below and I was done.

Lending Works My Lending Offers Screen
Click to enlarge, Lending Works My Lending Offers Screen

I have £78,430 queued ahead of my £300 and indications are that it will take 8 days to get my money into the market.  Until my money is in the market I’m earning no interest.

So let’s look at the Pro’s, Con’s and Differences as I see them so far:
  • The interest rates being offered are a lot better than best buy savings accounts.
  • Common with all P2P lenders that I am familiar with the risk profile is very different to a savings account.  For example I'm not covered by the £85,000 (soon to be £75,000) FSCS scheme and my lending capital is at risk. 
  • To reduce some of that risk profile Lending Works have some protection in place that they call the Lending Works Shield which is a little different from what I've seen with other P2P providers.  Firstly, they have a reserve fund which provides some protection against missed and late payments.  To date £12 million has been lent into the market and the reserve fund is £211,470 meaning 1.7% of loans by value would have to be missed or fall into arrears before I start taking a loss.  Secondly, they have an insurance policy to protect against borrower defaults, fraud and cybercrime. 
  • I potentially have a queue of 8 days until my money is lent during which time I’ll be earning no interest.  Waiting for a Borrower to match with a Lender is from my experience common throughout the P2P world as my experience so far suggests that the norm is more lenders than borrowers with more the more borrowers case being the exception.  Lending Works get you to form an orderly queue where my current provider gives me the opportunity to gazunder other lenders by accepting a lower interest rate or go in with a higher interest rate than other lenders with the risk that it could take a long time (if ever) to get into the market.
  • Repayments and interest reinvested using Auto Lend is however then prioritised over manual loan offers meaning I shouldn’t have that wait time.  It will be interesting in month two to see how short a period this actually is.
  • I was able to direct debit the £300 for free where my current provider charges £1.50 for deposits lower than £1,000.  
  • When investing for up to 3 or 5 years it doesn't work like a bank where you don’t see any of your money for the full period.  Each month you actually receive the principle and interest portion of each monthly payment back which you can either take or reinvest.
  • It took me less than 10 minutes to get an account opened and start lending.  

So far my P2P experience in general remains positive and it will be interesting to see how this experiment develops with time.  I’ll review my findings in a couple of months by which time my money should be in the market, I should have received my first interest payments and had my first interest/principle reinvestment.

Are you currently investing with Lending Works or another P2P provider?  Please do share your thoughts below.

...and as always please do your own research.


  1. Interesting post, RIT.

    I use Zopa (and have done for many years) and I am currently in the process of experimenting with RateSetter.

    I have not yet looked to experiment with Lending Works yet though. I have not researched that one much and until I have funds to do so will probably not get the opportunity.

    I am currently planning to review my experience with Zopa sometime soon and--once I have experimented with them for a while--will do the same with RateSetter.

    So far my experience of Zopa has been very positive and RateSetter equally so (though that has been tested far less extensively).

    I look forward to reading your updates on your experience!

  2. I just placed my first £500 into RateSetter, very quick and easy. Don't feel that at ease that the money is not split into £10 segments then spread over a range of borrowers. Feels a bit scary knowing someone somewhere has my £500. Although RateSetter claim no-one has ever lost money due to their back up fund, i do worry how quickly that fund could be burnt through with a down-turn. For now i will try and break any investments up into smaller amounts (say £200) then spread the lending out over a 1 week period. Bit scary that you could lends thousands in one go to one individual

  3. Hey RIT

    I do like this collaboration idea, good on Lending Works for going with it as it is very different from the usual advert.

    Yes, Lending Works was one of the first P2P companies I went with (the other was Ratesetter) - I started with £1k and it was as simple as you have described in your article. If I recall correctly, it took 48 hours for my loan to be take up.

    I'm in the process of 'diversifying' my P2P portfolio so am slowly spreading my cash among other companies.

    Whilst I'm not adding any new cash this year, I intend to do so next year.

    Good luck with the experiment!

  4. If the secret (singular?) of investing is to use uncorrelated assets, can you guess at the extent to which P2P might prove to be correlated with any of, say, equities, bonds, commercial property, and commodities?

    Suppose you could magically find another bank account paying (say) 4% p.a.: would you still do P2P?

    Declaration of interest: we might dabble when P2P ISAs are available next year - therefore keen to learn.

    1. A very interesting question. My thought would be that the type of P2P lending I'm investing in - those that make personal loans and have reserve funds - would operate like Cash.

    2. I see p2p as a means to buy more than an asset class. Ratesetter, Zopa etc are more like banks and cash like. Assetz and thincats more like low grade investment/corporate bonds. I sold my ORB portfolio and replaced with diversified loans on TC/AC

  5. Hi RIT

    I would take a look at Assetz Capital if you're going further in P2P lending. Rather than Ratesetter and Lending works which both tend to be unsecured personal loans to individuals where as Assetz Capital has asset backed business loans. Also Assetz Capital does not have reserve funds to cover late payments and defaults so you're directly exposed to these events but in return you get a higher rate and in the event of default hopefully the asset will cover your capital and interest although of course this is not always guaranteed. Currently I get a return of 10.78% after defaults.

    Even if that does not take your fancy they have a provision fund account which returns 7.0%.

    I would recommend going to the P2P independent forum ( to get more information on P2P in general and on various P2P companies which have staff remember regularly contributing to this forum. I'm clearing support Asset Capital but also take a look at Saving Stream and Moneything.

    This study has good information on how the P2P is and will grow in the future.

    Good Luck!

    1. Thanks for the info yellowman, particularly the forum. That Assetz Capital product looks like a much higher risk one than those that I'm currently experimenting with. It of course will be right for some and it sounds like it's working well for you.

      I know that P2P has a different risk profile to savings accounts, and of course I could lose my shirt, but personally my aim at the moment is to get as close to a Cash like investment as I can. My current P2P lending is going to someday be part of what buys my family a home. This is why the higher risk P2P is not currently for me.

  6. An interesting area and thanks for the full disclosure, RIT. I like the P2P story and prospects but as a higher-rate taxpayer in retirement it hasn't seemed worth the hassle and risk. However, I may well take another look as "innovative ISAs" get started, depending on their scope. Instead l have looked to the development of equities in the sector. Availability is thin so far. The new P2P Global IT is a way of paying 1% to asset managers to invest for you, but is targeting a return of 8%. l haven't bought into that - it hasn't settled down and is on an unjustifiable premium to NAV of over 7%. I hold shares in GLIF which has taken stakes in a number of platforms specialising in crowdfunding of SMEs where its management has experience and expertise. This is yielding 8.6% in my ISA.

    1. Thanks for sharing this Keith. The P2P world is really opening up at a quick rate and as you rightly point out it's just not in the lending space. As it matures I think a lot of the old school big fat corporations are going to have to start watching their backs.

    2. There's a very good blog on the subject by the vastly experienced and cautious Geoff Miller, head of GLIF. Here:

  7. FYI RIT, if you want to further experiment with p2p, perhaps have a look at who is a member of the Peer-to-Peer Finance Association ( Members are required to meet robust rules and conduct transparent, fair and orderly operation of P2P finance. The likes of Zopa, Ratesetter and Lending Works are members.

    1. Thanks for the link weenie. I'm sure that will also be of use to many readers.

  8. I do hope the 40k+ you have in cash is in high interest current accounts. You can get 3%+ on that amount. Your comment that only 1.6% is market leading is more than a little bit misleading. Eg TSB classic plus 2k@5%, club lloyds 5k@4%, BOS Vantage 3x15k@3%, tesco 3k@3%, Santander 123 @3% for rest. A bunch of regular savers around at 6,5,4% too. Only then are you stuck with about 1.3% for further instant access interest. And further away still if you can hold joint accounts.

    1. Are you doing this yourself month in month out?

      " more than a little bit misleading." I pride myself on my integrity both online and in person. I therefore can't let this one pass without a comment. Firstly, the account I listed was the closest to a clean account I could find on MSE. Secondly, the accounts you list are shown in the link to MSE I provided in the post. Thirdly, I didn't list them as I do not believe the average punter is going to be able to practically or want to game them all (they are after all just set up to allow the banks to advertise market leading rates) month in month out. If you tell me you are and have been without a mistake for a significant period then I stand to be corrected. Full disclosure from my side: Personally most of my non P2P cash savings are currently earning 1.24% with YBS.

      Let's look at them in a little more detail:
      - TSB Classic - you need to pay in £500 per month, don't accidentally go over the £2k otherwise you get 0% on the extra, to prevent going over you'll therefore need to be moving money out every month which won't be getting interest while in limbo between accounts (this will also be applicable to the accounts below).
      - Club Llloyds - here you need to pay in £1,500 per month, don't forget though or you'll be charged £5, you also need to be making 2 direct debits a month or you don't get the interest. Again don't go over or you'll get 0%.
      - BOS Vantage - your again needing to pay in, this time £1,000 per month or you get 0%.
      - Tesco - don't forget to pay in £750 per month or you'll be hit with a £5 fee. Don't go over the £3,000 or you get 0%.
      Santander 123 - need to be paying in £500 per month and have 2 direct debits. The interest will be taxed but you will also have to pay £2 per month after tax for the privilege. Don't forget any of these or you get 0%.

      So for your scheme you need to be depositing £500+£1,500+3x£1,000+£750+£500=£6,250 per month into current accounts. The only way I could think of doing this is to set up a process where you log in to a few accounts and transfer to the other accounts and then a few days later transfer everything back to the same accounts month in month out. But in this case you'll have money in limbo every month plus you'll always have some accounts below the max limits otherwise you'd be getting 0% on some savings at any time meaning you're not getting the advertised rates. Is that what you do?

    2. "he only way I could think of doing this is to set up a process where you log in to a few accounts and transfer to the other accounts and then a few days later transfer everything back to the same accounts month in month out": or you could use standing orders so that these supposed difficulties vanish in a puff of smoke.

  9. Hi RIT, no intent to question your integrity, I'm really sorry if it came across this way. I'm a keen follower of your blog.
    You basically set up a carousel of Standing Order transfers that repeat every 4 weeks. On the same day is fine, though some like to have them happen in sequence. I have separate SOs scoop of the interest each month and deliver to my main account. Where direct debits are required, one can use a tesco internet saver account that allows £1 DDs.
    Maybe it's not one for the average punter, but it doesn't take long to set up. Many on MSE forums do it.
    Anyway, different horses for different courses!

    1. And the reciprocal SOs mean you don't need a large balance or income. Mine works like a little water wheel machine delivering 3%+ on 50k ish with no or little maintenance.

    2. Ah Standing Orders are the key. I don't currently use any for anything so didn't even think of them. I've learnt something new today.

      Are each of your accounts dipping below the maximums for a period of time until the reciprocal SO catches up?

    3. I just have the reciprocal orders on the same day and the carousel works without risk to overdraft if a day or few is delayed. The only risk is some banks do and others don't process SOs on weekends and PHs, hence the 4 weekly cycle on, say, a wed or thu. Bankaccountsavings dotcouk shows examples. I've been doing this the last 5 years or so, the rates have stayed about 3% but the potential balance he dropped significantly (used to be able to get 100k@3%+). Fwiw I hold about 5% in high interest bearing current accounts and 10% in p2p as part of a 60/40 portfolio.

  10. Hi RIT

    I am wrestling with the P2P options at the moment - so a timely post

    There are a few things that I'm struggling with:

    1. The liquidity issue, I don't understand what happens if you want to cash in, yes they all seem to charge the 1% fee, but on top of that someone has to buy your loan from you - what will they pay you? this seems a bit of a grey area..

    2. Why can I get ~10% from Funding Circle and ~5% from Zopa? Is there really a massive difference in risk between the two?

    3. What strategy should you use to set your interest rate limits on Funding Circle?

    4. Should everyone just wait a year until P2P can be wrapped up in an ISA?

    My current feeling is that as I clearly don't fully understand the detail with the various P2P operators I should just heed point 4 and sit it out for a bit..

    1. My opinion on 2. I've been with both Zopa and Funding Circle for a few years now and if you have no defaults you'll certainly get a better return with Funding Circle. But with a diversified set of loans, you almost certainly will get defaults. My experience has been a similar return on both platforms with Zopa being much more consistent

  11. Nice post,

    I'll admit to moving cash around at the end of each month to take advantage of the various better returns on offer. It's a bit of a pain, but it's been a year now with no hiccups.

    Every review I've read on P2P lending has been positive, including yours. I'm holding out for the ISA option. The lack of FSCS protection is still a bit worrying.

    I've haven't seen a comparison of the various rates on offer from the P2P companies. The excess in return above the risk free rate should be compensation for credit default risk and a liquidity premium, relevant to each P2P loan (I think)...but I wonder how they all stack up.

    Mr Z

    1. "The lack of FSCS protection is still a bit worrying."
      Yes I agree. But I also note RIT's comment on Cyprus Banks under his first P2P Ratesetter Experiment post.

      RIT's comment was:

      "The other thing in the back of my mind is just how secure is the £85,000 FSCS Deposit Guarantee Limit. Our rulers have a bad habit of changing their minds and the rules when it suits them. For example, savers in eurozone banks are supposed to have their deposits protected to the tune of €100,000 yet when Cyprus blew up they were originally going to tax savings below €100,000 at 6.75%. How did they manage that? By calling the financial aid received a 'rescue' rather than a 'bailout' meaning the banks were not regarded as having failed. They eventually changed their minds but IMHO it nicely demonstrates how nothing is 100% guaranteed."



  12. Great post,

    I admit to moving cash around at the end of each month to take advantage of the various better returns on offer. It's a bit of a pain, but it's been a year now with no blockage.

  13. Does anyone have any experience with Fruitful? ? There is not a lot of info/opinions out there about them but the process seems to be quite straight forward.