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Unbolted Gets a Bad-Debt Provision Fund

By Jane Rey on 6th March, 2015 | Read more by this author

Unbolted now has a bad-debt provision fund to cover at least the first part of your lending losses. The fund will operate as a trust in the same way as the other P2P lending companies.

The new pawnbroking P2P lending company already offers lenders protection from losses with gold loans by fully insuring them against the price falling. (See Neil's article New Peer-to-Peer Pawnbroker: Unbolted for more about that.)

Now, it has started a provision fund for non-gold loans only.

More than symbolic

The bad-debt provision fund is just 1%, which is small compared to most other such reserve funds.

However, it is large enough to be more than just symbolic, particularly for people who decide not to follow 4thWay's guidance and lend across at least 100 loans (potentially hundreds more if you have a lot of high-risk loans) and a handful of P2P lending companies.

If even a small number of loans goes bad and you're not spread widely, it could mean that you lose money overall. A bad-debt provision fund of 1% might not be large, but it will protect you from minor disasters at the very least.

Rito Haldar from Unbolted had previously told my colleague Neil hat it expects losses to be less than 1%.

Unbolted will fund the bad-debt provision fund by paying 1% of the money you lend to the bad-debt provision fund. This will ultimately be taken out of Unbolted's fees, yet it could still cost you money if Unbolted reduces the interest rate that you get to compensate.

Quality loans is the most important aspect

For people who spread their risks, a bad-debt provision fund is far less important.

The most important aspect of any P2P lending company is its borrower selection criteria.

You need to know how accurately or tightly the P2P lending company rates its borrowers and offers them loans.

For loans secured against property, you particularly want to know how well they value property and how much less they will lend to borrowers than the property valuation.

These are the key criteria to help you decide what interest rates are appropriate or whether you should avoid the proposition altogether.

Read more in the 4-Step Strategy to Save Peer-to-Peer Lending.

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