Understanding P2P default data
Peer-to-peer lending platforms publish plenty of loan performance statistics but two of the most significant are anticipated and actual loan arrears – and here is why it matters to investors.
As with any investment, historical performance is not a guarantee of future returns but it can give an indication of how a P2P loanbook is structured and managed in terms of the level of risk and recovery.
This helps an investor assess risk by seeing how likely loans are to collapse as well as how good platforms are at recovering bad debts. Some platforms will publish anticipated arrears figures, which gives an idea of the percentage of loans in a given year that could default or fall into arrears.
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Many use the Financial Conduct Authority’s (FCA’s) default definition, which is when a loan is more than 180 days past its contractual payment date. But it is also important to check what a platform’s actual default rate is.
This figure is often lower as a lender may manage to recover funds, or loans may perform better than expected. For example, the largest P2P lender Assetz Capital’s probability of default rate for loans in 2019 and 2020 was 7.7 per cent and 6.2 per cent respectively. But its actual loss rate for these loans is currently zero. Similarly, Kuflink displays a default rate for loans under each risk rating as well as a blended figure. Its blended default rate for 2021 was 6.67 per cent but the platform said investors have not lost any funds as a result of bad loans.
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Unlike the FCA’s definition, Kuflink defines a default once a loan is one month late. “It is better to get in and out as quick as you can when the clouds turn grey, there is no special formula but it is dependent on each lender’s processes and staff and their experience in collecting loans and presenting defaults,” Narinder Khattoare, chief executive of Kuflink, said.
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Judith Tan, head of capital markets at Estateguru, said the key to reducing arrears is strong loanbook management and having conservative individuals in its risk departments across all its locations.
“It allows lenders to pick up on borrower behaviour and spot the warning signs sooner, so that they can reach out to relevant individuals at an earlier stage to ensure any potential delinquencies are addressed before entering litigation or auctioning of the asset,” she said.