There’s certainly no shortage of alternative credit sources for borrowers these days. Even if you’re sub-prime. One recent newcomer to my local high street isn’t a coffee or charity shop: it’s a sub-prime lender that describes itself as “a local business serving the local community”.
The business in question is Everyday Loans. It provides credit to people with bad credit records, and its stripped-back design sits in stark contrast to the old-fashioned bank on the opposite corner. The company was set up as an independent operation, but is now part of main-market-listed Non-Standard Finance (for more on the outlook for the sub-prime lenders, see our Sector Focus on page 58). It is not a payday lender (of the ilk of Wonga whose extortionate rates resulted in a cap on the price of short-term high-cost loans) and although it is pure sub-prime in terms of its customer base (CCJs, the self employed, tenants, the low paid and so on) and APRs (high), its process for selecting borrowers is old-school. At the core of Everyday Loans’ business model is a branch network and it relies heavily on face-to-face interviews to check paperwork and to judge applicants’ ability and willingness to repay their loans. About three-quarters of applications are rejected at the online, pre-interview stage, and many are refused at the interview stage too.
Peer-to-peer (P2P) might well be engaging in what Mr Odey calls a “profitable activity” but if there’s one lesson to be drawn from sub-prime for investors in P2P, it’s to focus hard on the risk side of the equation. Lending by peer platforms has soared in recent years, and although well-established P2P platforms such as RateSetter emphasise that their customers are not the sort of people who cannot get finance elsewhere, a key factor behind the growth of P2P is the banks’ unwillingness to participate in riskier areas of credit such as bridging finance, debt consolidation and small business loans.
The FCA has warned this month of hidden risks in P2P. It’s uncovered some types of P2P that are exposing investors to much higher levels of risk than they might imagine thanks to poor information disclosure and quality control. Furthermore, as the sector is still relatively new and has not been through a full economic cycle, when economic conditions tighten, losses on loans and investments may increase. Ahead of new rules arriving from the regulator, investors should not make snap assumptions about the true level of risk involved.
