Peer To Peer Lending Defaults – How Are They Handled?
If you are a regular reader of my peer to peer lending reviews, you’ll know I list platform failure as the single biggest risk to lenders. One of the other major considerations lenders face is loan defaults and capital and interest recovery. Most peer to peer lending platforms secure their loans but what good is the security if it can’t be recovered? None.
Loan defaults are an inevitable part of the peer to peer sector and something lenders have to become comfortable with. Defaults are wonderful learning experiences designed to keep lenders guards up. The first default is always a shock to the system and good reminder of why platform and loan diversification is so important.
When a loan defaults and the assets need to be recovered, legal expenses are incurred and are deducted from the recovery total amounts. These expense can mount up quickly and can result in lender capital losses.
Throughout my peer to peer lending, I have experienced several loan defaults. I thought it would be of value to highlight how these defaults have been handled by the various platforms.
All default amounts were accurate at time of writing (November 29th 2016).
Ablrate: 1 current loan in default
My single defaulted loan has been making its way through the court system since July 2016 and is now in the hands of the recovery lawyers. Ablrate’s recovery actions have been impressively swift and they have always kept lenders updated via email. I’m unsure how much capital and interest will be recovered due to the nature of the unconventional assets.
Assetz Capital: 3 current loans in default
Out of all peer to peer platforms I invest in, I have the most confidence in Assetz Capital’s recovery process and team. All my defaulted loans are secured by property so while I expect the processes to be lengthy due to the nature of the loans, I do expect to receive capital and interest; exactly how much is unknown. Assetz’s website provides very detailed updates on the recovery process and timeline.
(It is best to avoid defaults if possible so I try to sell Assetz’s loans on the secondary market if I feel they maybe be headed for trouble. Some investors are willing to take a chance on troubled loans, sometimes due to lack of loan supply.)
Bondora: 5 current loans in default
Very little recovery information is provided on defaulted loans other than that a default payment judgment has been obtained. Since loans are unsecured I don’t expect much in the way of recovery but anything recovered will be a bonus. You can read more about Bondora’s recovery process here on page 21.
(I no longer invest in Bondora due to the volatility and defaults.)
Funding Circle: 3 current loans in default
In early 2016, I decided to exit Funding Circle due to the interest rates. I sold all but three of my loans on the secondary market and never looked back. The remaining three unsecured loans are still in default and two will probably be total losses despite Funding Circle’s very capable recovery ability. Funding Circle provides sporadic recovery updates on their website.
Funding Secure: 4 current loans in default
I currently have two jewellery loans in default. Past experience has shown Funding Secure is very capable of recovering jewellery items by selling at auction. Most items sell easily however one of my recent defaults did not sell at auction and has been rescheduled.
Two of my defaulted loans are property related and while recovery is slow, Funding Secure appears to be handling them appropriately. One loan has been in recovery since February 2015, and the other since June 2015. With property recovery, the legal process can be lengthy even when the receivers are actively marketing the assets. When you invest in property loans and they default, be prepared for a significant recovery wait.
On a positive note, a recently defaulted car loan was successfully recovered and all capital and interest was repaid.
Funding Secure is very good about keeping lenders updated through their website, even if there is nothing to report.
Lending Crowd: 1 current loan in default
The loan in question is a business loan secured by property owned by the Director. The loan has been in default since late 2015 and recovery is still in process. I expect the property to be sold sometime in 2017.
Rebuilding Society: 3 current loans in default
The first Rebuilding Society loan I invested in is currently in default and was a punishing lesson on diversity. I invested far too much money into the loan as a due to my inexperience and I paid the price for doing so. The loan was unsecured with only a personal guarantee, which I view as somewhat worthless. The loan defaulted in late 2015. The borrower has made a few repayments since default but for the most part, Rebuilding Society has been chasing the borrower for repayments with little hope of recovery.
My second defaulted loan, I believe was taken fraudulently since the borrower hasn’t made a single payment since the loan was drawn down in late 2015. The borrower since filed for insolvency and collection and recovery has so far been fruitless.
My third unsecured loan defaulted after only two payments, the second being almost one month late. The borrower had taken three additional loans with another peer to peer platform leading me to once again wonder if fraud had occurred. The company then proceeded to wind down. Since the loan is unsecured, I expect little in the way of recovery.
Three great lessons in why you should be careful about investing money in unsecured loans; and when I say unsecured, I mean anything other than property and assets that can easily be sold. Most debentures and personal guarantees are worthless.
Through the art of good timing, Rebuilding Society has posted an article about its recovery process here.
Unbolted: No current loans in default
I have experienced a small amount of defaults on Unbolted and they were handled so effortlessly, I didn’t even realise the loans had defaulted. No notifications of defaults were given and the loan assets were sold at auction and the funds returned soon after. Unbolted assets are jewellery based, so selling and recovery isn’t so much of an issue as compared to property. Having said that, it would be nice to see Unbolted provide more information on defaulted loans because recovery won’t always be so painless.
As you can see, default recovery varies drastically from platform to platform. There are many variables that determine whether you will experience a full return of capital and interest or a loss.
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This article is for information purposes only and should not be considered as investment advice. Opinions expressed are based upon my investing experiences. All information was deemed to be correct at the time of writing. Peer to peer lending contains risks so never invest more than you can afford to lose.