Defaults and losses

When you invest in loans, it's always a possibility that some of them won't be paid back or might lose money.

To help manage risk, we've developed a way to estimate expected defaults, where borrowers don't stick to their payments, and losses, where loans actually lose money.

It's worth saying that most of our accounts have a Provision Fund, to help cover any defaults and losses, but the Provision Funds are discretionary and could become depleted so they can’t guarantee that there will never be a loss.

Please note that we are reviewing how we publish our Defaults & Losses in light of FCA Policy Statement 19/14 and also taking the opportunity to review our credit risk model. This work will ensure that we are fully compliant with all new requirements and make the information we provide even more meaningful.

Key investor information

How we manage the loan portfolio

When a borrower takes out a loan, they agree to many conditions that they have to stick to. One of the simplest conditions is that they'll make their loan payments on time.

If they breach any condition of their loan, we'll monitor that loan more closely and more often (the loan is in 'Monitoring'). If there's a material breach of the terms of the loan, we classify that loan as having had a Credit Event.

If a loan has had a Credit Event, it can go back to being 'performing' if the borrower fixes the breach - by catching up on payments, for example. If they don't fix the breach, or if there's information that casts sufficient doubt over whether they can fully repay the loan, we classify the loan as in Default.

Losses might happen after a Default, but not necessarily every time. If a Default happens and the borrower can't solve the problem, we can take recovery and/ or legal action to get the money back from them. If it turns out that they don't have enough assets or security to recover the money, that's when a loss might happen and a lender could lose some or all of your investment.

If a loan has a Credit Event or is in Default, we'll suspend trading in it, which means nobody can sell or buy a share in it. We might also suspend trading if the loan is in Monitoring and we need a Lender Vote to decide what action to take.

'Credit Event' could amongst other things mean:

  1. The loan is more than 60 days past its expiry date and hasn't yet been fully repaid.
  2. The loan repayments are more than 60 days overdue, or the borrower is more than two payments behind ('in arrears').
  3. There has been a breach of the terms and conditions of the loan such as failing to pass a covenant test.

'Default' could amongst other things mean:

  1. The loan is more than 180 days past its expiry date and hasn't yet been fully repaid.
  2. The loan repayments are more than 180 days overdue.
  3. We have information that casts sufficient doubt on the borrower's ability to fully repay the loan.

'Loss' or 'Bad Debt'

This is the actual or expected loss, if any, on a loan in Default, after any money we've been able to get back from the borrower. To keep losses to a minimum, we take security on all loans. So, in many cases, defaults don't automatically lead to a Loss or Bad Debt, as we can use the security to get some money back. This means the 'Default' rates might often be high, but the 'Loss' or ‘Bad debt' rates can be lower.

Our track record

£935m
How much we've lent since 2013
3.85%
The average predicted lifetime losses since 2013
3.75%
The average actual lifetime losses since 2013

All of these numbers come from our loan book, which has been independently verified by Brismo. You can see all of the figures in full on their website.

All figures are before any possible coverage of losses by the Provision Fund (which apply to most of our Investment Accounts) and are for loans that started in each year.

Correct as of 30 September 2019.

This table was last updated on 4 November 2019.

  2013 2014 2015 2016 2017 2018 2019
For Current Loan Types Offered To Borrowers
(note: these figures do not include loan types that have been discontinued – data including discontinued loan types is shown below)
1. LOANS ORIGINATED £6.1M £21.6M £20.4M £79.9M £200.5M £300.0M £209.2M
2. INTEREST RATE 13.0% 12.7% 10.4% 9.0% 7.4% 7.6% 7.4%

This is the annual interest rate due to lenders, before any bad debts, if they had diversified (spread) their investment perfectly across all loans originated in the year in question (with the investment spread proportionately across the total amount originated on all loans).  Investors in Investment Accounts with capped interest rates would not have received these interest rates, with any surplus above the capped rate being added to the relevant Provision Fund.  These rates are not a guide to interest paid to any individual investor either in the past or in the future.

3. CURRENT ACTUAL LIFETIME BAD DEBT RATE 5.5% 6.7% 0.0% 4.1% 0.6% 0.0% 0.0%

Losses based on actual loan performance to date (after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: of loans in Default originated in 2013-2015, 85% of the amount lent has been or is expected to be recovered.

4. LOANS REALISED 100% 100% 97% 72% 75% 36% 5%

The proportion of amounts lent which have now been repaid or are included as current actual bad debt (not now expected to be repaid).

5. CURRENT DEFAULT EXPOSURE 0.0% 0.0% 0.4% 19.6% 2.5% 0.7% 0.4%

Loan principal amounts remaining on loans in Default that are over and above the expected bad debt on those loans. This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: in 2016, 88% of current default exposure is from Bridging Finance loans.;

 
For All Loan Types including those no longer offered to Borrowers
1. LOANS ORIGINATED £9.2M £38.1M £26.4M £101.1M £210.6M £300.5M £209.2M
2. INTEREST RATE 12.5% 11.7% 10.5% 9.1% 7.5% 7.6% 7.4%

This is the annual interest rate due to lenders, before any bad debts, if they had diversified (spread) their investment perfectly across all loans originated in the year in question (with the investment spread proportionately across the total amount originated on all loans). Investors in Investment Accounts with capped interest rates would not have received these interest rates, with any surplus above the capped rate being added to the relevant Provision Fund. These rates are not a guide to interest paid to any individual investor either in the past or in the future.

3. CURRENT ACTUAL LIFETIME BAD DEBT RATE 6.1% 9.4% 1.0% 3.4% 2.7% 0.0% 0.0%

Losses based on actual loan performance to date (after actual and expected recoveries). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure. Note: of loans in Default originated in 2013-2015, 85% of the amount lent has been or is expected to be recovered.

4. LOANS REALISED 100% 100% 95% 69% 74% 36% 5%

The proportion of amounts lent which have now been repaid or are included as current actual bad debt (not now expected to be repaid).

5. CURRENT DEFAULT EXPOSURE 0.1% 0.0% 2.6% 15.8% 2.9% 0.7% 0.4%

Loan principal amounts remaining on loans in Default that are over and above the expected bad debt on those loans. This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

6. ACTUAL LIFETIME DEFAULT RATE 53.4% 33.4% 14.1% 32% 9.7% 0.8% 0.4%

This is prior to actual and expected recoveries (which are taken into account in the bad debt rate figures above). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

7. EXPECTED LIFETIME DEFAULT RATE AT ORIGINATION 6.9% 6.7% 5.4% 5.9% 5.0% 4.6% 4.5%

This is prior to actual and expected recoveries (which are taken into account in the bad debt rate figures above). This reflects defaults that arise at any time over the life of a loan and is not an annualised figure.

The discontinued loan types consist of (a) Renewable energy loans and (b) Secured SME term loans not secured by a First Charge on a property.

 Default rates, bad debt rates and Default exposure are expressed as a percentage of the loan amounts originated for the year. 

  Please note that we are reviewing how we publish our Defaults & Losses in light of the FCA Policy statement and also taking the opportunity to review our credit risk model. This should ensure that we are fully compliant with the new requirements and provide the information in a way that lenders find meaningful. 

 

Our loan book, including all loans issued since inception, has been independently verified by Brismo who have calculated our net investor returns (after fees charged to borrowers and bad debt, but before tax) and display them compared to other platforms on their website:

https://brismo.com/market-data/

Brismo measures what an equal time-weighted exposure to every loan would have returned over the preceding 12-month period. The return therefore reflects a portfolio that is perfectly diversified across all loans throughout any period. Loans that Brismo treats as defaulted are written down to the actual historic average level of recovery by an originator and actual recovered amounts are reflected at the end of the recovery process. The return figures assume that all income is re-invested immediately and that all capital invested is deployed in loans.