Why security matters for investors
Secured peer-to-peer loans are increasingly popular with investors, as an additional way to mitigate risk in their P2P portfolio.
Security gives investors extra confidence when backing P2P loans. If a borrower defaults on a loan, technically the underlying asset could be sold and an investor will be repaid assuming there is a buyer and the full amount can be recovered.
Property is the most common asset used as security by a number of property, business and consumer lenders.
Read more: P2P bosses predict rise in unsecured loan defaults
Assetz Capital takes a security charge on the property of a business for its secured small- and medium-sized enterprise term loans, while Folk2Folk will also take a security on property or land.
ArchOver may take fixed or floating charges over a company or a legal guarantee on its secured loan products.
Meanwhile, there are P2P pawnbroking platforms such as Unbolted or HNW Lending that let borrowers unlock cash from assets such as jewellery, classic cars, art or fine wine. These assets can be sold to repay a lender if a borrower defaults.
Read more: Exclusive: P2P property lending nears £5bn
A platform will often arrange an independent valuation of the asset and it may be taken into storage for the duration of the loan.
“With an unsecured loan, if the borrower’s business takes a nose-dive and they can’t repay the loan, lenders will lose out big time,” Ben Shaw, chief executive of HNW Lending, said.
“It’s the same in the case of an unsecured loan to an individual where the costs of pursuing the individual through bankruptcy are likely to outweigh the funds recovered.
Read more: How can P2P property investors buck the downturn?
“Secured loans have the second reassuring layer of collateral.
“Of course, you will first chase the borrower and try to get repaid. However, if that fails then you take the security and sell it.
“Assuming that it sells for something close to what it has been valued at, lenders are unlikely to lose their capital and will probably get paid their interest in full too.”
P2P analysis firm 4th Way suggests investors should favour charges taken over specific assets – that then can’t be sold without a platform’s permission – rather than fixed or floating charges that are based on what finances the business has available.
Read more: How to address inflation with your P2P portfolio
