Peer-to-Peer Lending Glossary And IFISA Glossary
This is our glossary of terms, giving you all 4thWay'sdefinitions and definitions.
An administrator (otherwise known as a “receiver”) is someone appointed to wind down aplatform or provider, if it has failed or gone bust. They are practioners who are usually accountants by background.
Administrators are expected to attempt to return as much money to lenders as possible by taking over the management of the existing loans until they are all repaid.
Usually, multiple administrators are appointed from one firm of accountants who specialise in. (That's why you usually see the plural of administrators and receivers.)
In the UK, administrators in this industry are appointed with approval from the financial regulator, the FCA.
The right to build or develop in the airspace above a property.
A developer should have these rights before borrowing to develop in such spaces.
Homebuyers might buy two homes and sell one, while retainingabove it, so that they can build sideways above their remaining property and over the other one.
With increasing frequency, office blocks in dense cities have overhangs and and even complete office spaces over the tops of older buildings.
When an interest rate, bad-debt rate or some other percentage rate is, it's presented as the average change over any 12 months.
For example, if you earn exactly 1% interest every month and you withdraw the interest each month to your bank account, you're earning 12%interest.
For you, lending £100 would ean you £1 + £1 + £1 + £1 + £1 + £1 + £1 + £1 + £1 + £1 + £1 + £1 until the end of the year, for £12.
If you re-lent the 1% interest as soon as it's paid to you, theinterest is 12.68%, because you'll earn interest on top of your interest. Like this: £1 + £1.01 + £1.02…with an ever increasing interest each month.
Whether you lend for one day or 10 years, or anything in between, theinterest rate is still 12.68%. This means your money is working just as hard for you as it is for someone else who lends in the same loans as you for a different length of time. That's why annualisation is so useful – it makes performance easier to compare regardless of length of time you lend.
One more example: if you lend £100 today and suffer bad debts of £10 in exactly two years' time, you've had 10% bad debts. However, on anbasis, you've suffered 5% bad debt, because it took you two years, not one year. You've also been earning interest for two years, so you need to earn 5% interest per year – that's – to cover your bad debt, and not 10%!
An asset is property or items that have real value.lending is when you lend to a borrower who has specifically put up one or more as collateral. A site can repossess the asset (if it is not already held in possession) and sell it to recover any bad debt.
In P2P lending to individuals, this could be houses, cars (especially luxury models), yachts, fine wine, art, antiques or jewellery.
In lending to businesses, physical businesscould be property, land, plant, machinery or equipment.
Another very common type of asset is customer invoices: if the borrower is a business and it's owed money by customers, the asset transferred to lenders is the right to some or all of the money owed by the customer. You see, money is an asset too.
All these things have value. When P2P borrowers have them, it can add a huge layer of protection for lenders.
A(also “provision fund”, “ ” or “ ”) is a pot of money that some companies set aside to cover expected bad debts. They use this to pay you your money back when a borrower fails to do so. The provision fund also usually pays you the interest you're owed.
Amight pay you right away, as soon as a borrower's payment is late, so that you don't even notice the payment was going missing.
Alternatively, you might have to wait one to four months, although it will still cover any missing interest.
Finally, if the P2P lending company orprovider also does , it might only pay you back from the provision fund after it has tried to recover the losses through repossessing the property first.
When a provider starts offering a, you need to check that the money is truly segregated from its own bank accounts, and that it can only be used to help you and other lenders recover bad debts. If it isn't truly, legally separated, then there is a risk that it will not pay out at some point in the future. The funds would instead be used by the provider, potentially to pay its own debts.
In the world of P2P, there is no significant difference between a P2P bond and an interest-only P2P business loan.
You lend your money, get paid interest usually on a monthly basis, and at the end of the loan the borrower repays you the amount you lent. Most P2P bonds last five years or less.
P2P bonds are usually secured and there is no difference with. Just like P2P loans, P2P bonds can be ranked first, second or joint with other debts. (See “ ” and “ ”.)
So far, P2P bonds have been issued to small or medium-sized businesses only, and not to larger businesses.
Confusingly, P2P lending websites – just occasionally – issue their own bonds, which means you lend to the P2P lending websites. As such, you are not lending to lots of borrowers P2P style, but to one business. Consequently, you should treat such a bond as an individual loan, and spread the rest of your money out elsewhere accordingly.
The only other point of note is that bonds are usually secured.
The technical difference between bonds and loans
The technical difference is that a borrower “issues” – or sells – bonds, whereas a loan is issued by the lender.
Outside of the P2P world there are two other relevant differences:
1) Loans can't usually be traded whereas bonds can. Inside P2P, both can usually be traded.
2) Non-P2P bonds are typically for 10+ years, whereas most non-property loans are for less than five years).
Traditional (non-P2P) bonds
P2P bonds are drastically different from many other types of bonds, so here is a run down from other areas:
If you have a pension and you don’t know what it’s invested in, you probably own some non-P2P bonds.
These bonds are loans from investors to governments or to businesses.
On the risk and reward scale, government bonds are roughly as safe as savings accounts.
Non-P2P bonds to businesses fit into four loose categories, largely distinguished by their size:
1. Corporate bonds and 2. retail bonds
Corporate bonds are very large and typically last ten years or more, although retail bonds are generally still pretty large at around the £100 million mark.
In terms of risk and reward, corporate and retail bonds generally sit between savings accounts and(although there's a lot of variation), because the companies you're lending to tend to be larger and safer.
This means the risk of rapidly losing money is potentially smaller than with, but the risk of your wealth being eaten by rising prices over the longer run is considerably higher, due to the much lower typical interest rates.
3. Mini bonds
Mini bonds are smaller and less safe than corporate or retail bonds. It's too early to say how these compare to, but the interest rates seem low for the risks involved and it is not easy to sell them to exit early.
The final category isbonds. These are, so far, to small- and medium-sized businesses and are generally in the low millions or hundreds of thousands.
“Savings bonds” offered by banks are a different kettle of fish altogether. For all intents and purposes, those are really fixed-term savings accounts, and so you should view them as such.
This might be to buy a property at auction before a proper, long-term mortgage can be arranged, or a temporary loan prior to getting tenants so that a cheaper buy-to-let mortgage can be arranged.
Ais also used when you buy one property before you are able to sell off an existing one, “bridging” the gap in a property chain.
These loans often involve temporarily over-extending a borrower, so that they have more debt than they otherwise would be able to take.
See, below, because there can be some overlap.
Ais land that was previously developed. It could potentially be redeveloped.
Some P2P lending sites allow lending to borrowers who are seeking to get planning permission to develop athat they own, or lending post-planning permission to develop such sites.
In US English,has a different meaning: abandoned industrial land that is somewhat contaminated.
There is no legal definition of the word. However, it's usually used to mean borrowers who are believed to be very likely to repay their entire debts and interest, without falling into trouble along the way.
borrowers usually have an income that can be used to meet loan payments, and they usually pay lower interest rates. However, it is not necessarily limited to just “prime” borrowers (which is another term that has no legal definition).
The word “” is not generally used for payday lending, because the proportion of bad debts is very high.
It's also not usually used when talking about short-term lending against property and possessions, if there's no income being earned directly from that property. While recovery of bad debt on those loans can be high, it is quite typical that many of the loans turn bad.
One platform might call a borrower, while another does not. Ultimately, anyone who successfully repays a loan, or would do so if offered one, is . It's up to each bank or company to weigh the facts and decide if this is likely or not.
Ais a loan to develop a building site. This might include tearing down existing premises, completing groundworks and putting up a new building. Or it might be renovating an existing building.
Usage of the phrase “” varies. Some businesses approve loans for the initial purchase of a site or to hold onto a site prior to getting planning permission, and they still call these . Other businesses classify those loans as pre- or .
are often approved in tranches.
When you spread your money across lots of loans, you haveyour risks. is the single most important task of an investor who makes money through money lending.
Take for example the lender who lends in just one. Something might easily go wrong with the development; for example, if the grounds prove to be far more problematic to build foundations on than the initial survey projected. Costs could then spiral and the project could fall behind – and into trouble. The lender might easily lose money.
However, if you're lending across many dozens of, the risk of all of the developments suffering the same problem is practically zero. The more loans you are in, the lower the risk of suffering poor results from bad luck.
Borrowers sometimes have a loan limit approved, but are not required to take the full amount right away. To keep their costs down, they “draw down” the loan – take chunks of it – when they require it.
In some cases, a draw-down schedule is fixed in advance, and the borrower needs to meet conditions before drawing down more money. These draw downs are called tranches.
is investing in startups by buying shares in them through online investing platforms. It makes a stark contrast with P2P lending. Money lending – including P2P lending – is typically a stable and relatively low risk type of investment. Whereas buying shares in startups is typically a very high-risk investment.
Financial Services Compensation Scheme
The most important purpose of the Financial Services Compensation Scheme is to protect people from losing money in bank accounts and savings accounts, in the event a bank goes out of business or runs out of money.
Money that you're currently lending is not covered by the.
Because money lending is an investment, and investment losses are never covered by this scheme, whether it's the stock market or anything else.
However, the scheme isn't completely irrelevant in.
Unlent money that you have deposited with Which P2P Lending Sites Offer ) Protection?platforms or providers is often covered by the , because the cash is typically held in a bank account covered by the scheme. (Read
The scheme could also compensate you if you've received inappropriate investment advice from a regulated financial advisor.
Theis a government-enforced scheme funded collectively by the banks and many other regulated financial firms.
or “taken into trust”
Amight have a or the can be “taken into trust”.
Both of these just mean that, if the borrower is unable to pay its bills, you will be first in line to get your money back, including interest, when the property is sold to recover losses. Other lenders are later in the queue than you and will only get any of their money back after you have got all of yours.
A loan that is ranked first in this way can also be called “”.
As far as we individual lenders are concerned, this is the most secure form of.
Compare with “” and “personal guarantee”, and see also “ ”.
Ais any that the borrower is not usually allowed to sell or destroy, so that P2P lending sites can be more confident the will be available to repossess and sell in the event the borrower is unable to repay in full.
When a loan is secured against real property (real estate), vehicles or other physical, it is usually with a .
Acan be a , or lower.
The amount of new money you can put into an ISA each tax year (fromto 5th April the following year) is capped. With a , if you put new money in, you can withdraw it and put it back in again without losing part of your capped allowance, provided you put it back in again before the next tax year starts.
Ais any that the borrower is usually allowed to use up, which could be business plant and machinery, or cash in the bank.
It is a far weaker form ofthan a , since there might be no left by the time the borrower becomes unable to repay the loan.
Many business loans are secured with fixed-and-, which tend to be more floaty than fixed, and the is not usually properly valued by the P2P lending site in these cases. 4thWay usually finds that fixed-and- perform perhaps marginally better compared to “ loans” when it comes to collecting on bad debts, but this is often offset by more of those loans going bad.
See Financial Services Compensation Scheme.
Growth investing is investing in shares of business that you believe are going to grow very rapidly. Growth investors will often pay seemingly high prices for shares compared to value investors, in the belief that current prices are fair due to the huge prospects for the business in future years.
Contrast growth investing with value investing.
One aspect of good lending is setting interest rates and/or borrower grades correctly. If bad debts rise smoothly with interest rates and borrower grades, they are said to beor, more commonly, to have .
If awebsite doesn't establish , this is a very strong signal that they do not understand their borrowers.
Individual lenders, or researchers such as those at 4thWay, can assesswhen a P2P lending platform or provider shares its full historical loan book, showing the details and loan status of every loan.
Innovative Finance ISA or
Tax-free lending accounts for residents of the UK that may or may not involve.
You can lend to a wide variety of people, businesses and property owners through different, although most of them either limit your lending through one site or, if not, they come with additional costs.
Most people do not need to pay taxes on their lending even when using ordinary P2P lending accounts and it is not sensible to decide what to invest in purely based on tax advantages. There are other restrictions tothat could prevent you from spreading your money around widely enough.
For many people, a combination of ordinary P2P lending accounts and The . Guideis the most sensible way to satisfactorily contain the risks. Read about when to use in
4thWay lists P2Ponly, since direct lending between individual lender and the end borrower (so-called “peer-to-peer”) reduces the risks.
(In case you care,in full stands for Innovative Finance Individual Savings Account, but despite the word “savings”, lending is actually a form of investment.)
A loan that is “” is a bad debt.
It varies how or when P2P lending sites define their loans as. And the definitions change over time due to individual P2P sites' discretion, coordination from the P2P Finance Association, or updates to rules laid down by financial regulators.
Although there is room for interpretation, for UK-basedcompanies, parts of the definition is regulated by the . The UK's financial regulator says that loans that are 90 days late for a payment, or for repayment, are to be classed as . For property loans, it's 180 days.
Those time limits aside – and in P2P lending sites not regulated by the FCA – acompany might also class a loan as when it has started recovery proceedings. They might also class a loan as if it needs to be extended or otherwise renegotiated.
In some cases, if a P2P lending site sees that there is a good chance the borrower will be unable to repay a loan, it might also class the loan as.
Inflation is when prices go up.
That’s the prices of bread, medical prescriptions, plumbers' services, and everything else that we buy.
The problem is that, if prices rise 3% and we have only earned 2% in a savings account or cash ISA after tax, we have become poorer, not richer. And that's even though our savings account balances look larger!
So the interest we earn, after tax, has to match the inflation rate in order for us to preserve our wealth.
Governments cause prices to rise, mostly constantly by sanctioning more money to be created at the press of a button, and then finding creative ways to multiply this money and flood businesses, and then people, with it.
More money swimming around for roughly the same amount of goods and services means that prices rise.
Other things can also cause price spikes and dips, but that's not the main cause of inflation or, usually, a long lasting one.
Governments create inflation because it makes it easier for them to repay their debts, even though it makes it harder for responsible savers to preserve their wealth.
This is why inflation is called a “stealth tax”: it takes from savers to help out borrowers.
Governments often accompany inflation policies by forcing banks, pension companies and other businesses to lend more to the government – using the extra money that was printed.
With more people being forced to compete to lend to the government, it pushes down the interest rates the government has to offer in order to successfully borrow more.
is when you lend to business borrowers who put up amounts owed by customers as collateral. These amounts are shown on customer invoices – hence the name of this kind of lending.
In some cases, a P2P lending platform/provider can arrange for customers to pay them – or even to pay directly into a segregated account for lenders.
In other words, the borrowers' customers don't pay the borrower. The customers pay through the P2P lending company. The P2P lending company disburses the loan and interest to lenders, while returning any excess to the borrower.
In, the borrower and P2P lending company might agree in advance which invoices are to be used as collateral. Or the collateral might be based on all the borrower's outstanding invoices instead.
For longer-term lending, the collateral could be rolling: when existing invoices are paid and new ones are drawn up to replace them, those new invoices become new collateral for the loans. In this case, borrowers are required to maintain a level of sales and invoices, or they will face conditions that could involve the full debt being called in immediately.
branches into what is called invoice discounting and invoice factoring. On balance, the distinction is more important to the borrower than lenders. In any event, the lines between them sometimes blur to the extent that the names themselves have little meaning.
From a lender's point of view in, it's most important to understand the inherent risks. For example, this means ascertaining whether specific invoices are taken as collateral, whether the invoices are rolling, how long the loans are for, and how easily the cash paid by the customers can be diverted to the lending account.
An institutional lender incan be a bank, pension fund, private lending business, an investment fund such as a hedge fund or investment trust, an insurance company, or another financial-services business.
Institutional lenders lend their clients, customers, shareholders or members' money throughsites.
They might lend online by opening an account in exactly the same way as individual lenders, or they might be offered separate deals and a different way to lend.
The institution might be treated preferentially to individual lenders, or worse, or exactly the same. Read more about the many different ways P2P institutional lending happens in Is Institutional Lending In Peer-To-Peer Good For Individual Lenders?
A loan that is junior to other loans means that those other loans will be repaid first in the event that the borrower is unable to repay all debts. Therefore, if such a borrower becomes unable to repay such a loan, the risk of lenders losing money is higher – sometimes considerably so – unless thesite or provider has very tight criteria in approving those loans.
In, the loans that rank above a might have been provided by one or more banks, or by smaller, non-bank lenders. Alternatively, they might come from other P2P loans through either the same P2P lending site, or one or more other P2P lending sites or providers.
There can be several tiers of, all sitting below the most and either ranked consecutively or ranked equally, or a mix of the two.
The rank of aneeds to be properly agreed through legal and contractual means. See “ ” for more.
are sometimes called , mezzanine finance, mezzanine loan, subordinated debt or subordinated loan.
means how easy it is to get your cash back early – before borrowers repay your loans. The natural life of a P2P investment is usually the full length of a loan. You can't always fight nature, so it will sometimes take longer to get your money back.
can also refer to how much cash flows through a bad-debt . If it's very liquid, there's a good supply of cash ready for instant use. Illiquid funds might have enough planned bad-debt coverage, but they don't have enough cash immediately available.
, like a , is a means for paying for expected bad debts, as well as for late payments, so that lenders receive their expected dues every day without interruption. Like a , it's also for sharing the bad-debt load with other lenders, so that no-one suffers losses merely because they are unlucky with the borrowers they are lending to.
differs from a in that it's not funded with a large amount of money in advance. Instead, as much of the daily borrower payments as are needed are diverted into it to cover actual bad debts and late loans that occur that day.
In some cases, when actual bad debt has been lower than expected, thefund might receive higher payments that equal the expected amount of bad debt, in order to offset more losses in the future.
If bad debts are higher than expected, lenders can usually expect to see the interest they're earning come down, so that lenders are collectively pay for the additional amounts taken by thefund.
Especially for larger, more complicated property loans, such as short-term, the process of attracting borrowers and assessing loan applications is not usually called but “loan ”.
Unlikeof smaller loans that are approved or rejected automatically, there is usually more of a customer service element offered to the borrower, and that hand-holding is all part of originating loans.
Since these loans can't be processed automatically, the speed at which theplatform can manually process a loan is important to many borrowers. Originators need to ensure that good borrowers don't walk away before the process is complete.
People working as loan originators are sometimes financially incentivised to ensure that enough loans are completed, which can conflict with a duty of care to ensure high standards of loans.
If a property is valued at £100,000 and the borrower borrows £70,000 then this is 70%, or 70% .
It means that lenders have an estimated buffer of 30% if the property needs to be sold to recover the debt.
However, just because the loan is smaller than the property value, there is still a risk to individual lenders of losing money. Risks include:
- Most companies have surveyors physically inspect the property, but even then it might be valued incorrectly.
- The price of the property might fall.
- The costs of chasing the borrower, repossessing and selling the property might add up to thousands of pounds.
- You might face delays in getting your money back. Recovery procedures can take many months. (Although your P2P lending company might reimburse you earlier through a .)
- Particularly when combined with incompetence at the platform (although it can happen to anyone) there's the risk that borrowers borrow fraudulently and run off with the money.
Mezzanine lending is always ranked the lowest, meaning that all other lenders to the same borrower – be they banks or anyone else – are ahead of the mezzanine lenders. Therefore, if the borrower is unable to repay, mezzanine lenders are the last in line to get their money back and the interest due to them. The exception is if the borrower also haslenders, which will take the back of the queue.
This form of financing is usually used to fund property developments. It's sometimes also used to purchase a
development property or in .
Depending on the precise contract with the borrower, mezzanine is often distinguished in another way: if the loan goes bad, it converts into part-ownership of the company that owns the property.
In practice, this shouldn't usually lead to worse – or better – outcomes in recovering bad debt versus an ordinaryloan. But it depends on the competence of the platform.
Sometimes, lenders are also allowed to choose to convert the loan into part-ownership even if the loan doesn't go bad. The contract might allow for lenders to do so after a period of time passes or even at will.
See Loan .
is lending to borrowers through online and electronic lending platforms. If the platform in the middle goes out of business, there is zero or near zero risk that loan repayments can be diverted and used to pay the platform's own debts, such as money it owes to its own bank. Repayments due to lenders using the platform are ring-fenced against that scenario.
The platform itself, and any businesses that the platform owes money to, are not able to get their hands on lenders' money under any legal circumstances, especially if the platform goes bust.
To achieve this, lending contracts are either directly between the platform lenders and platform borrowers, or a legal means is used to get virtually the same level of minimal platform risk.
In legal terms, the three most common ways to achieve P2P lending status are:
- A direct contract is written between platform lenders and platform borrowers.
- A “deed of assignment” is used to transfer ownership of an outstanding loan and interest to platform lenders.
- A separate, “bankruptcy-remote company”, called an , is set up. This is a company used purely to hold one or more loans for the benefit of platform lenders, with no trading or operations.
In each case, the platform in the middle does all the paperwork and administration on behalf of the lenders.
Whether a platform offers automatedor whether lenders select loans themselves is irrelevant. Both can function as .
Not all platform risk.are , so some come with greater
Note that “” is not a regulated phrase
Some businesses call themselves P2P lending that do not meet the above definition. Others, choosing to market themselves differently, say they are not peer-to-peer, even though they do meet the definition above.
In practice, when genuineplatforms have closed, lenders have been receiving their repayments as expected.
Business borrowers sometimes give their “personal guarantees” that they will repay a business loan using the owners' and directors' own money and property, if the business is unable to do so. They will often support this by submitting evidence of their wealth.
Some people call personal guarantees “”, but it is a considerably weaker form of and no-one here at 4thWay considers it to be a form of .
Often, personal guarantees are taken when it is not possible to get “proper”, which indicates higher risk by itself.
It's also not usually possible to force borrowers to hold onto their property, money or other wealth with a personal guarantee.
Initial statistical evidence from the industry collated by 4thWay shows that personal guarantees are usually of minimal or no value when it comes to recovering bad debts. It remains to be seen whether personal guarantees reduce the chance of debts going bad in the first place.
Ais a loan to an individual, rather than a business. They are sometimes called “consumer loans”.
Usually, when a bank orsite says “ ” or “consumer loan”, it's referring to standard, of £100 to £25,000, available to borrowers who are deemed very likely to be able to repay.
These loans are typically repaid monthly and last from six months to five years. These are the sorts of loans you typically see advertised by banks.
Specialisedtend to be called something else entirely, such as , payday loans or loans.
In online or electronic lending, platform risk is the risk to lenders of losing money or interest due to loan repayments being diverted to cover the lending platform's own outstanding debts, or to pay for any additional costs of winding down existing loans if the platform goes out of business.
Property lending and property loans
is when a borrower already has a loan and then repays it by borrowing again. A borrower might seek to refinance through the same or a different provider.
In P2P lending, lenders already lending to a borrower can often choose whether you want to keep lending when the loan is refinanced, and you can decide again how much money they want to lend.
If the borrower seeks to refinance through the same provider, the borrower is usually assessed again. This means the loan application might be rejected, or the borrower might be offered different interest rates, or additional terms and conditions.
However, some P2P lending sites guarantee to borrowers that they'll be allowed to seekat the same interest rate from their lenders, provided the borrower meets all the outstanding interest payments.
can serve a useful purpose for borrowers and be lucrative for lenders, but it can also be a simple device for a P2P lending site to hide problem debts, because those debts can easily be rolled over many times.
Therefore, until a P2P lending site has established a long and successful record on such loans, lenders might consider staying clear of loans that are refinanced through the same P2P site; allow yourselves to be bought out by other lenders if a loan you're lending in is going to be refinanced.
Residual method of valuation
Most developments probably don't involve the bulldozering of large chunks of useable buildings. (Where buildings already exist, developers more typically redevelop and renovate those buildings.)
However, when this happens, you will be particularly grateful for the “residual method” of valuation, which is used to value the current, pre-developed site.
A development site's value is higher when it already has official planning permission to create a building that any reasonably talented developer could sell for a profit to a reasonably talented landlord who could let it for a profit.
Unless a developer comes up with an even better idea for the site, it is likely that the development will be completed by someone, at some point, even if it is not done so by the existing developer.
Therefore, the residual method first takes the expected sale price of the property and then deducts all the costs of development – from the sale costs, to the developer's loan interest costs to the construction and deconstruction costs, as well as a contingency for unforeseen costs. You also deduct, say, 15% for the developer's profit.
What is left is the current value of the site – the residual value.
Since a lot of factors are involved in the residual method, and they are forecasts of the future, it is trickier than doing an ordinary valuation based on the existing property and current local property market prices.
However, the current value based on local prices won't have much value after the developer comes swinging the wrecking ball.
Ais a phrase used by some P2P lending sites that have , which are segregated pots of money set aside to cover lenders' expected bad debts.
In the event the fund is completely depleted, these P2P lending sites will call a, which means they'll pool all outstanding loans, so that they're shared between all lenders. This spreads the risk between all lenders and makes it much less likely that any of them will lose money.
Not all P2P lending sites withare going to call .
is a phrase used in the financial industry in the UK (and in many other countries) to officially describe ordinary investors. (Or ordinary lenders in the case of P2P.) Many people who lend through P2P are in this category of investor.
are mostly expected to invest (or lend) in simpler types of investments that are typically not high risk.
In P2P lending,are often called “restricted investors” or “everyday investors”.
Businesses that sell investments that the financial regulator considers to be especially complicated or high risk must endeavour to exclude as manyas possible from receiving any promotions and marketing. They must also ask investors to confirm their status and inform them not to invest at all if they are .
(including P2P lending ) is a unique case. Due to the relatively low risk and relative simplicity, are allowed. But because the P2P lending industry is so new, the P2P lending companies are required to get investors to earn a little bit of experience before they allow investors to lend freely.
in P2P are therefore initially capped at lending 10% of their investment pot. Lenders may swiftly promote themselves to a new category of investor after gaining a little P2P lending experience. They are no longer then as far as P2P lending is concerned, but rather “self-certified sophisticated investors”.
Further reading: Do “Sophisticated Investors” Have Less Legal Protection?
Acan have a . (Yes, and third charge.)
This means that there is another, pre-existing loan secured against the same property has a higher priority than yours (a).
Let's say that you have lent money to a borrower with, and the borrower can't repay, so the property needs to be repossessed and sold. You will only be able to recover your money after the lenders with a have got all theirs back, including the interest they are owed.
Loans that are not ranked first can also be called “”. (See “ ”.)
A second secured debt could increase the risk of the borrower being unable to pay the first debt. So aholder must normally agree before the borrower can get another charge.
It might do so if it thinks thewill improve the borrower's finances, e.g. by keeping it afloat during a difficult time or because the loan will be used to improve the borrower's property and increase it's value. It could also simply accept a if it sees no risk.
Second charges on P2P loans add a layer of complication in assessing the risk to lenders. The mere presence of acan indicate higher risk.
Compare with “” and “personal guarantee”, and see also “ ”.
Sometimes a borrower can't or won't repay all of a debt. When this happens, it can be possible for a P2P lending company to repossess their property and sell it, so that it can reimburse us lenders from the proceeds.
Getting a court order to repossess and sell a property or possessions is a bit easier to do if the loan is secured against the borrower's property and possessions before the contract begins. (Contrary to popular belief, it's not impossible with anloan. Just more difficult.)
And it's even easier to do this if the property is not inhabited by the borrower and his or her family. So we're talking buy-to-let property, offices or shops, as opposed to residential homes, or other, such as cars and yachts.
The property that has been put up for the loan is called the “”. So a buy-to-let landlord “secures” the loan against the property, which becomes the .
Sometimes theis not related to the loan. There might be a loan to an individual who is not buying a house, but the loan might be secured on his/her house, or on a car or other . Sometimes multiple vehicles or properties are taken in .
It is normal to lend considerably less to the borrower than the property valuation, so that there is room for error and so that there is breathing room if property prices fall.
doesn't have to be against land and buildings. You can secure loans against yachts, TVs, art collections, wind turbines and much more. Real property (real estate) is usually among the best type of , since it is usually easy to value, demand for it increases constantly and its value tends to rise over time.
Borrowers might be prohibited from sellingor taking any action that devalues it, which adds substantial protection for lenders. See for more on that kind of .
Not allis equal in legal terms, as it can put different lenders in different places in the queue when recovering bad debt. See “ ” and “ ”.
The quality of thebecomes more questionable when the lenders hold on it decreases: see “ ” and “personal guarantee”.
Secured business loans are frequently – but certainly not always – drastically different to loans secured against land, buildings, vehicles and other valuable items.
Business loans are often secured against whatever cash, inventory and equipment the business has, which might be worth considerably less than the loan, the value of themight be going down in value, and it might be being spent or used up by the business.
Suchcan still be better than loans, in that it can put you at the head of the queue if there are lenders.
In the P2P lending industry, most – but certainly not all – business P2P lending websites either do not value theor do not share their valuations with individual lenders.
Hence, with secured business P2P loans, it often makes full sense for individual lenders to focus on such things as bad-debt rates rather than rely onto bail them out.
The deal might be the same, similar, better or worse than what individual lenders get online.
This is still not common in P2P lending, but it will happen more as P2P lending sites grow.
Self-certified sophisticated investor
(investors) can choose to self certify as sophisticated. In doing so, you're allowed to invest – or lend – in a wider variety of investments.
By self-certifying, you don't lose your usual legal protections against mis-sold investment or scams. It's usually very easy to self certify. This classifcation of investor is mostly to get you to think before lending, not to restrict you from lending.
The financial regulator keeps a tight grip on the definition of “sophisticated”:
Standard P2P lending/definition of self-certified sophisticated investor
There's a standard definition used by mostwebsites. Here, one of the following should apply:
- You've chosen and lent in more than one loan and/or lending account in the past two years. They can be from the same P2P lending/ provider, but they need to be separate loan agreements (which they usually are) or portfolios of loans. This includes the provider that you are self-certifying for, if you have previously lent through it.
- You've worked in the provision of finance in the past two years, resulting in an understanding of the P2P agreements or portfolios you will be lending in through the specific P2P lending platform.
- You've been a member of a network or syndicate of business angels for at least the past six months.
- You've been a director of a company in the past two years with annual turnover of at least £1 million.
If you don't pass that definition when you start lending through awebsite, you might pass it by the time you open the next lending account. So you might quickly be able to pass the test. Also, some websites allow you to re-classify yourself as soon as you pass. This means you could, for example, lend in two loans (two loan agreements) through them and then reclassify.
Traditional P2P lending/definition of self-certified sophisticated investor
Someplatforms have adopted an older, more traditional definition, which makes it a little harder for lenders to self certify, because your prior P2P lending experience doesn't count.
In the traditional definition of a sophisticated investor who self certifies as such, you must have one of the following:
- Invested in more than one unlisted company (a company not on the stock market) during the past two years. This includes , which is buying shares in startups through online platforms.
- Been a member of a network or syndicate of business angels for at least the past six months.
- Have worked in the private equity sector or in the provision of finance for small businesses over the past two years.
- Been a director of a company in the past two years with annual turnover of at least £1 million.
Further reading: Do “Sophisticated Investors” Have Less Legal Protection?
Ais ranked above other loans to the same borrower that are secured against the same property. This means that the loan will be repaid first in the event that the borrower has other debts that are ranked in a junior position.
Occasionally, more than one loan can be equally ranked as senior, in which case the loans are usually repaid proportionally.
For example, a borrower has just £1,000 in cash and otherand it is unable to repay two debts, one for £9,000 and the for £1,000. Assuming they were both senior – equally ranked – one borrower will receive £900 and the other will get £100.
If the loan for £1,000 was senior and the other loan was not, the entire £1,000 loan will be repaid first.
Your prospects of recovering all your money are higher if you are in theposition. However, a is more likely to suffer problems if the borrower is overstretched through too much .
See “” for more.
Anor “special purpose vehicle” in is a company that is set up exclusively to house a loan, or multiple loans, on behalf of lenders.
If set up correctly, it ring-fences the loans so that any repayments and interest due to be paid by borrowers can't be diverted to thesite, or to businesses that the P2P lending site owes money to.
For this reason, SPVs are known as “bankruptcy-remote entities”.
Theis not a trading company and has no other operations.
It's usually the P2P lending company that sets up SPVs to house loans, but sometimes it's the borrower itself.
is when an analyst takes the results of a website's historical loans and extrapolates what might happen to those loans, or a similar batch of loans, in the event of a downturn.
A downturn could be a shrinking economy, a house price fall, rising unemployment or other similar scenarios that lead to more loans turning bad.
Theand are calculated using a stricter version of the that banks around the world are required to do on their own outstanding loans, the so-called Basel tests.
Some loans – especially drawn down in stages.– are typically approved in tranches. Developers need to demonstrate that they have spent their money and got through a phase of the project before the next tranche of money is raised. Sometimes, all the money is already raised at the start but
is looking at all the facts in a systematic way, based on set criteria, to decide whether a loan application should be approved, and at what interest rate.
For smaller loans, such as regularor small business loans, much or all of the process is often automated based on looking up data from credit-reference agencies and the electoral roll. In those cases, an will get involved when data can't be found or more information is required.
Loan .can sometimes be more of a qualitative assessment, which is especially the case for larger, more complicated property loans, such as short-term . See
in is when a P2P lending site has partnered with one or more other financial businesses that lend their money, or their clients' money, first.
So, when you use that P2P lending site lend, the loan has already started. When you lend, you are actually buying loan parts from the partner company that lent to the borrower in the first place. You are still lending directly with the end borrower.
The reason for this is firstly to ensure that borrowers can get their money quickly if they need it. Secondly, it means there is a more stable supply of loans for you and other individual lenders, enabling you to lend more quickly. Finally, it means there is no waiting period where you earn no interest, because you don't have to wait until enough lenders pledge to take part before you can start lending to a prospective borrower.
If a borrower is in trouble, he is likely to try to repay secured lenders before you, so he doesn't lose his home or his buy-to-let property, perhaps.
loans are further down the pile when it comes to recovering money when a loan actually does turn bad. Any lenders with will be able to recover their money first.
Contrary to popular belief, if a borrower stops paying andebt, the lender can easily get a court order on the borrower's property and possessions – if there are any. Then, whenever the property is eventually sold, the lenders will get their money back before the borrower is able to receive a penny from the sales.
This is not theoretical. It is extraordinarily easy to get such a court order. It can only really go wrong, at least with , if there was a technical flaw with the court application.
The-turned-secured lender can then go one step further: it can get another court order to take possession of the and sell it. This forces the borrower to sell, so that the lenders' wait to recover some or all of their lent money is shorter.
This second court order can be harder to get, particularly if you're talking about a small loan and it would involve chucking a family out of its home. It's at the judge's discretion.
If a property needs to be sold, as anlender you will still be last in the queue behind any pre-existing secured lenders. And you will still be at the bottom of the pile even if you have got court orders to become a secured lender and to repossess and sell the property.
And, in the event oflending, there's no guarantee that the borrower has any substantial, solid property or possessions that can be sold on your behalf.
This doesn't make alllending bad – by any means. Some of the safest P2P lending you can do is to very high-quality borrowers, who often take out , combined with a decent-sized .
Value investing is investing in shares that you assess to be priced below their value. For example, if shares in a strong business are valued at less than ten times their profits, many value investors are likely to consider it in “value” territory. Alternatively, if the shares are valued at less than all theof the business (e.g. its property, plant and machinery) then investors might also consider it a value stock.
Contrast value investing with growth investing.
This might be relevant when buying shares incompanies, as opposed to lending through their websites. However, many of the same principles of value investing are also easily applied to itself.
A wholesale warehouse facility is when the original lender in a batch of loans is lending largely with borrowed money through a credit facility or agreement specifically for that purpose. The entire facility is held in a bankruptcy-proof company called a Special Purpose Vehicle or.
There are some typical features in. The facility is usually worth nine figures or more. The original lender will fund a portion of the loans with its own money and will lose their non-borrowed money first in loss events. And the loans are usually held in the warehouse until they can be sold through .
This can also be called “warehousing” or “monoline”.
In theindustry, Funding Circle, one of the biggest P2P companies now operating across the UK and the US, operates as an original lender, investing in loans with borrowed money. This is a separate activity and separate revenue stream to Funding Circle's online P2P lending platform.
Lenders using the online lending platform operated by RateSetter – formerly one of the biggest P2P lending platforms in the UK that has since been sold to Metro Bank – once took the position as wholesale lender in some loans before the regulator banned this form of P2P lending. However, while this was wholesale lending, it was not.