About Klear’s 4thWay PLUS Rating And Other Important Information
I'm going to explain some more details about Klear's 2/3 Hidden Gem 4thWay PLUS Rating and its 4thWay Risk Score, but also take the opportunity to cover some other important aspects that came up in my team's investigations.
What does Klear do?
Klear* offers personal loans to Bulgarian borrowers of up to five years, repaid monthly. To lend, you must be both a citizen and a tax resident of any EU or EEA country.
Klear has completed BGN 33 million (€17 million) since 2016.
That figure potentially overstates the total lent by a considerable margin, because some borrowers have borrowed up to 11 times through Klear, with the average borrower borrowing two to three times.
Lenders should view repeat borrowing as one single, long loan, until evidence is provided to the contrary.
About Klear's 4thWay PLUS Rating
Klear has earned the 2/3 Hidden Gem 4thWay PLUS Rating, but it's on track for a 3/3 Exceptional rating.
The proportion of loans that have ever turned bad, or that are outstanding now but late, is under 3%. This figure is higher than the one reported by Klear on its website, as we standardise the definitions of “late” and “bad debt”, and interpret its detailed data as conservatively as possible. But it's still very low for this kind of lending.
More importantly, Klear has sufficient history and results to show that lenders should survive a major recession and property crash combo in the future.
Our tests, based on a stricter version of the global banking “Basel” standards, forecast that lenders who use sensible lending strategies can expect to still make a profit of about 2%, on average, on loans that are open at any point during that huge downturn.
So there appears to be an excellent margin of safety.
The reason Klear loses a point, and so has the 2/3 Hidden Gem 4thWay PLUS Rating, is because its data doesn't quite provide us everything we need.
In particular, it's hard to see if there's not a lot of problem debt being kicked down the road. Many Klear borrowers borrow, and re-borrow, again and again, and the data doesn't make it easy for us to trace and assess this process.
About Klear's 4thWay Risk Score
Klear has a very attractive 4thWay Risk Score of 5/10. 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 Klear sits well on the risk scale, and here it's in line with most of the best, balanced peer-to-peer lending providers in Europe.
Klear's lending account earns this 4thWay Risk Score, because our tests for a severe recession and property crash indicate actual one-off losses before interest will only hit 6.39% of the amount lent, on average, over the full life of the loans.
(Lending interest of perhaps 6.25% every year on those loans will more than cover that hit, as the loans are repaid over the years.)
Lenders spreading their cash across many dozens of loans shouldn't lose money in good times. During a severe recession and property crash, based on our strict tests, less than 10% of people lending in 180 loans should see losses, if they hold on to their loans to the end to keep earning interest to offset losses.
We expect that most people who lose money during such a downturn will do so because they panic and sell early. In so doing, they will hold onto their bad loans, while not offsetting them by earning interest on their good ones.
Automated lending and how easy it is to lend
We have little data on how much lenders get to diversify or how quickly, so you might have to be patient while your money is lent out. You lend every hour when fresh loans become available. Klear approves dozens of loans every month, with over half being its lowest risk loans.
There's a chance you might end up lending in more than one loan to the same borrower, although you won't know it when it happens. This slightly increases the urgency of spreading across more loans to decrease the risks.
Klear and some partners pre-fund loans and continue to hold a significant proportion of them. This makes it more likely that you'll be able to buy fresh loan parts off them quickly in the first few months you start lending.
Picking loans yourself
The absolute priority is to spread across many loans quickly. For the kinds of loans that Klear offers, we estimate you should be aiming to build up to 180+ loans to hugely contain the risks in a downturn.
If you still decide to choose individual loans yourself, our analysis of Klear data shows that it grades loans and prices interest rates well for the risks. Even so, the higher the grade, the more variable you can expect lenders' results to be.
Minimum lending amount
You lend across more than one loan with as little as BGN 100 (€51).
Since Klear started, lenders have typically been able to sell 92% of their loans within five days. When you can't sell, you still earn interest while borrowers keep repaying naturally.
Money lending is supposed to be from when the loan starts until it ends – and sometimes you can't fight this. While you might often be able to sell most of your good loans in days or hours, you should expect that you sometimes won't be able to sell any of your loans at all. That's just part of the game.
Unusually, Klear lets you sell loans that are many payments late and you can sell for as steep a discount as you want in order to get rid of them. You can't, however, sell for a profit by charging more than your loan parts are worth.
The very limited evidence we've seen suggests you might need to sell loans for a discount when selling loans connected to borrowers who have been late to meet any payments on any loans in the past two years. Perhaps one-third of loans have had delays of some kind, even if just briefly.
The Bulgarian lev has been pegged to the euro since 2001. It's been valued at 1 lev to €0.51 ever since then. Until the peg breaks, lenders who normally use euros will not see gains or losses that are caused by a change in the exchange rate.
If your own currency is a different one altogether, you will face losses or gains, depending on how your currency moves versus the lev. See The 12 Key Peer-To-Peer Lending Risks for ways to minimise currency risk.
Regulation and lending structure
Klear is regulated by the Bulgarian National Bank, which overall is a pretty good regulator according to the International Monetary Fund.
Bulgaria hasn't developed extensive regulations specifically for P2P lending, so Klear uses pre-existing regulation. But it still uses a legal lending structure that is very common in many countries, which effectively assigns loans to lenders, while segregating any cash held in a separate client account.
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The 4thWay® PLUS Ratings are calculations developed by professional risk modellers (someone who models risks for the banks), experienced investors and a debt specialist from one of the major consultancy firms. They measure the interest you earn against the risk of suffering losses from borrowers being unable to repay their loans in scenarios up to a serious recession and a major property crash. The ratings assume you spread your money across hundreds or thousands of loans, and continue lending until all your loans are repaid. They assume you lend across 6-12 rated P2P lending accounts or IFISAs, and measure your overall performance across all of them, not against individual performances.
The 4thWay PLUS Ratings are calculated using objective criteria that can be measured and improved on over time, although no rating system is perfect. Read more about the 4thWay® PLUS Ratings.
4thWay® may sometimes charge rating fees to P2P lending companies to cover the costs of the extensive analysis that we conduct.
*Ratings fees and impartial research: our service is free to you. 4thWay receives compensation from the P2P lending providers listed on our European website, as direct fees to cover the costs of conducting quarterly ratings assessments, or as commision when you open accounts. We vigorously ensure that this doesn't affect our editorial independence.