Peer to peer lending defaults explained
In January, so far, we have repaid capital of £2,063,000 with interest payments of £88,693.23 to 936 investors.
Four peer to peer loans were redeemed. Two of these were redeemed later than expected, one redeemed early and one on time.
Up to the end of 2017 we have raised £49 million for peer to peer loans, investors have earned an average interest rate of 9.2% and there has been no loss of capital.
As the business grows and we take on more Peer to Peer loans it is inevitable that there will be some borrowers that are unable to pay their loans back on time.
The key thing to remember is that your money is protected by the underlying security of the loan which is based on a professional valuation of the secured property.
However we fully appreciate that some of our investors may well be concerned about this and with that in mind we wanted to clarify a few common questions we get asked by investors about loans going into default.
For some of you this will be the first time you experience a loan going into default – for some you may have had several loans go into default. We hope this information will give you some reassurance that this is normal in the secured lending business (especially at the end of the market we are operating in) and can even boost the overall interest rate you receive.
What does a “default” actually mean?
Default simply means the loan has gone past it’s due date for repayment, it does not mean you have lost any money. The majority of defaults are resolved with the borrower paying the money back after the due date and incurring some penalty fees, but without us having to repossess and sell the property.
How do our default rates compare to others?
We have been reassured by the broker network we use that our default rates are approximately the same as other peer to peer lenders who operate in the same space and pay investors such high returns. It is a fact that, in order to be able to pay such a high return to investors, there will be a higher level of defaults than you could expect from say a mortgage where the borrower is paying an interest rate of 4% and the loan secured against their home. If you want to receive such a high rate of return you need to accept that this will happen.
Why do defaults happen?
Every borrower must provide us with a credible exit strategy before we agree to provide them with a loan, defaults are often down to unforeseen circumstances that neither we nor the borrower could have predicted. Deaths, divorces, downturns… anything that life can throw as someone has the ability to change their circumstances and the ability to repay on time.
Would lowering the LTV reduce the default rates?
Lowering the Loan to Value on our loans would almost certainly have a beneficial impact on the default rate. But it would significantly lower the returns that we are able to pay you to around 3 or 4%. A huge difference. This sector of the market is highly competitive with banks and mainstream lenders wining most of the business. We would find it difficult to generate sufficient business from our current sources. We believe the risk and return are well balanced at the current levels.
How can a default be good for my overall return?
In an ideal world every borrower would pay back every loan perfectly on time, but unfortunately as we don’t live in an ideal world we have to make do with penalty interest. When a loan goes into default your interest rate immediately goes up to 12% p.a. until the loan is redeemed. This can boost the overall return of your investments.
We are constantly working to improve our underwriting, lending and redemption procedures and have undertaken the following actions:
- We are constantly working to improve our underwriting, lending and redemption procedures and have undertaken the following actions:
- We are including a liquidity analysis of property and doing everything possible to check how robust the exit strategies are.
- We have adopted more stringent policies on who we will lend to and on what type of property.
- We have reduced the max LTV of loans secured against properties in Prime Central London to 60% as we believe property prices are declining there.
- We are increasing the number of letters and contact with borrowers during the loan period to remind them of the redemption date and what will happen if they do not repay.
- We have introduced more punitive clauses into the loan agreements to force borrowers to appoint multiple agents, reduce asking prices and seek refinancing well before the redemption date.
- We have instructed surveyors that they should be conservative with their valuations
- We are in the process of appointing GVA to spot check and audit surveys from each of our panel solicitors to ensure they are accurate.
If late payments cause you concern then you should be aware that we will be introducing our new Auto-Invest model on 24th February.
This will pay you a fixed rate of interest twice a year and allow withdrawal of capital on 30 days’ notice (subject to terms and conditions).
This won’t stop defaults in itself, of course, but it will make your interest payments regular and make it easier for you to get back your capital when you need it.
We hope this answers some of your questions, If there is anything you would like to discuss please do not hesitate to contact one of our member support team.
For more information on our peer to peer lending process, click here.