When investing through a peer-to-peer platform, as an investor you are exposed to credit risk, liquidity risk, and platform risk and your money will be at risk.
- Credit risk is the risk that borrowers do not repay their loan.
- Liquidity risk is the risk that as an investor you may not be able to get your money back before the end of the your investment.
- Platform risk is the risk you take to Leap as a platform.
To find out more about platform risk, please visit our Platform Risks page.
Additionally, Peer-to-peer lending is not covered by the Financial Services Compensation Scheme (FSCS), therefore your capital is at risk.
For more information regarding risks, please visit our FAQs.
How do we manage credit risk?
We take a careful approach to lending and only lend to borrowers who have been vetted and can demonstrate that they are able to pay back the loan. This allows us to reduce expected losses for investors. However, borrowers’ creditworthiness may change over time and cannot be guaranteed.
How do we approve borrowers?
Our vetting process is rigorous and constantly reviewed.
To help ensure this, we only utilise the most effective underwriting techniques which include:
- Credit checks – we perform credit-bureau assessments on all borrower applications.
- Affordability checks – we assess a borrower’s income, expenses and levels of debt.
- Identity checks – we use sophisticated software to verify a borrower’s identity.
As an investor, your funds are automatically spread across at least 5 borrowers, reducing your exposure to risk. The fact that your investment is diversified across a range of loans means the impact of any individual borrower not paying is greatly reduced.
We mitigate borrowers’ risk:
By refinancing loans
We offer the borrower a loan with repayments at the same level or lower than what they currently pay. This helps make sure they can afford to make monthly repayments.
With a rate reduction scheme for borrowers
We reduce the rate on repayments for borrowers who reduce their debt. This can then reduce the risk profile of borrowers as well as make the payments more affordable to them.
With an active arrears management process
We have a thorough arrears management process for borrowers who miss payments. To help get things back on track, we undertake a debt review and affordability analysis to assess the borrower’s situation. Together with the borrower we agree on a repayment plan to increase the likelihood of full repayment.
- As an investor, you would start to lose capital. This means that you would receive back less money than you have invested.
- It may also take longer than expected to get your money back and access to your funds might be restricted.
We allow early repayment
At Leap, borrowers are able to pay back their loan early with no additional repayment fees. If this was to occur with one of your investment’s underlying loans, you would receive that money earlier than expected.
How do we manage liquidity risk?
You can sell your investments on to other investors provided the loan has been active for at least 12 months and the borrower is up to date with all the repayments.
There is a risk no investors are available at that time to buy your investment, therefore delaying your ability to get your money back early.
As Leap is launching anew, the default rate will not be available till a year from the start of operations. After 12 months, we will be able to publish actual default and arrears statistics.
Currently, we will provide expected losses based on the assumptions we have made while building our credit model.
|12 months||24 months||36 months|
|Expected cumulative default rate at origination||0.56%||2.16%||3.82%|
The estimated default rate is an estimate of the percentage of borrowers on our Platform who are unable to repay their loan and interest. The default rates that we predict are based on empirical knowledge of the UK consumer credit sector and the performance of the loans we originated.
How will Leap returns for investors expect to perform against expectations?
We will measure our returns performance partly, but critically, by comparing expected returns to actual returns. This will contribute to our track record of delivering competitive returns, and also will hold us to account on how returns actually perform, compared to what we expect.
Other investment matters
Paying taxes on money you earnt
We don’t deduct tax from your interest, so you’ll need to declare your earnings to HMRC in your tax return.
At the end of each tax year we’ll give you an income statement with details of the interest you’ve earned. You’ll be able to download this from your dashboard and use it to fill out your tax return. We will also report any earnings to HMRC.
You can get more guidance here: http://www.gov.uk/guidance/peer-to-peer-lending