Why you need loss protection when investing in Peer to Peer lending
If there was one strong lesson learnt from the GFC, amongst many, it was that the issuers who had their own capital invested and at risk in their offerings to investors (“skin in the game”) were the ones that typically survived the GFC, because they took on better risk at the time of obtaining the loan and were more committed to returning capital back to investors. It was their money at risk as well, and in some cases the issuers are the last to get their capital back.
Marketlend is very committed to this concept. It is a wholly owned Australian company that is here for the long term and testimony to that is that we invest with the lenders. We invest in first loss position and are charged fees for that investment similarly to the lenders.
Protection against losses
- We are the only peer to peer lender in Australia to provide first loss protection which can be as high as 30% in addition to a loss provision. This means we invest with the lenders and suffer the first loss in a situation where a borrower defaults.
- There is a cost to this protection and it is taken into account in the fees paid by the borrower and not charged to the lender. In addition to the loss protection, we also have a provision for losses.
- The only peer to peer lender in Australia with a provision for losses as well as Marketlend is Ratesetter, and based on their figures as of 29 July 2015, they have A$444,372 in the provision, for loans outstanding of 6,034,957 equivalent to 7.36%.
- To date we have invested on average 12.44% in first loss protection and this is individual protection. This means that there is no depletion of the loan protection for one loan if another loan fails, whereas Ratesetter does not offer the same.
- As a note, based on the website of Thincats UK, there are cumulative expected losses of 1.16% for their 5 year period, 2010-2015.
- We do offer insurance on our loans. It presently is only available for our debt finance product. The policy states that where there is a failure by a borrower, this will result in an ability to make a claim on the borrower for 90% of any invoices we purchased. Again we will invest the remaining 10%.
- Marketlend has had no defaults to date.
At Marketlend, all fees are paid by the borrower, and not from the loan proceeds other than the Loan Listing Fee (0.5%). This is an important point as that if it is paid from the proceeds of the loan, it means the investor is funding the costs.
Below is a snapshot comparison of our fees compared to Thincats.