What role does Connective Lending play in pricing a P2P agreement?
Connective Lending operates a P2P platform using the pricing model. This means the platform sets the price of the agreement and the lender picks the loan. When setting a price of the agreement, Connective Lending carries our vigorous due diligence on the borrower and the asset. This due diligence assists us to determine the risk a particular loan carries and helps us to accordingly set the price of the agreement that we see appropriate against that risk. The price is set in accordance with the risk category we've determined based on the credit risk assessment conducted. It remains the choice of the lender to participate in any loan Connective Lending places on to its platform for funding. You must consider if you have the necessary experience and knowledge in order to understand the financial risk.
What due diligence is undertaken against the borrower?
Connective Lending carries out extensive due diligence on its borrowers to understand their individual unique requirement and proposition. The type of due diligence undertaken depends on the type of loan the borrower is requiring (property or pawnbroking) however, it will include where necessary, independent valuations, credit checks, scrutiny on the exit strategy and proof-of-ownership. Further details regarding our due diligence process can be found on our Due Diligence page by clicking here.
How is the loan risk assessed?
Assessing the risk of a particular loan requires the firm to undertake due diligence on the borrower and the asset to comprehend which area may affect the performance of the loan during the term of the loan agreement.
For a pawnbroking loan, one area of risk which is assessed is against the asset that is being pledged. Here we carry out due diligence on what the realisable value of the asset in auction or trade will be, to help develop an understanding of the market this asset could be sold into in 6 months’ time. Asset values can fluctuate over time, depending on the type of asset which is being pledged, hence we rely on third-party specialist valuers to help provide an accurate value of the asset that’s being pledged.
Fraud is also another area where due diligence is required to ensure the borrower is the true owner of the asset. As part of our due diligence process, we will request proof of ownership by obtaining receipts, insurance documents, assess if the item is in its original packaging, V5 documents (vehicles) and other such documentation to help prove the asset belongs to the borrower. Where this cannot be obtained, we question the borrower to determine if they are the true owner of the asset being pledged.
Property loan risk requires the firm to undertake due diligence against a variety of factors to help develop an overall understanding of the risk a particular property loan may pose to our lenders. When assessing the risk of a loan we will:
- Conduct an RICS valuation, to help determine the Open Market Value of the property. We obtain an independent third-party ‘red book valuation’ of each property which is conducted by a valuer who is also a member of the Royal Institution of Chartered Surveyors (RICS). The valuation helps us to understand the overall condition of the property, how marketable the property is, information regarding the local area and concerns that may affect the value of the property now or in the future.
- An exit strategy is a key area to help us understand the potential risk of a loan. The exit strategy, or alternatively, the method the loan is to be repaid at the end of term, is important to assess the potential risk.
When determining if a borrower is eligible for a loan via Connective Lending, certain criteria’s must be met. These criteria’s are dependent on the type of borrowing and are set out below:
Pawnbroking Eligibility: the borrower must be able to demonstrate proof-of-ownership.
Property Loans Eligibility: A borrower must have:
• Clear title to obtain a first legal charge.
• Is an investment property and not a property that is habited by the borrower or their direct family.
• Had no more than 3 CCJ’s within the last 6 years.
• Had no more than 4 late payments or arrears against secured loans/mortgages.
• Has not been made bankrupt in the last 3 years.
Loan Payment and Default Procedures
Late payments and loans defaulting are inevitable within the lending industry. However, having clear procedures in place for dealing with such scenarios when they do occur can assist in minimizing disruption and costly delays.
Connective Lending have set out a clear procedure for dealing with loans that may fall into such categorises depending on the nature of the loan agreement. For pawnbroking loans, the sequence is simpler and direct as we hold the assets in our possession during the loan term. For property, the procedure requires us to engage with an LPA receiver who will be brought in to handle the recovery process. Our default procedure and steps to recovering assets when defaulted can be found here.
Connective Lending operates a Secondary Market to assist lenders to liquidate their investment if/when required, subject to a buyer being willing to purchase the loan part. The process is manual requiring the lender (seller) to select the loan part they wish to sell, enter the amount they wish to sell and any premium or discounts they wish to apply.
Connective Lending does not play a role in facilitating the sale of a loan part between a seller and buyer, however, it simply provides the platform to display P2P agreements that lenders wish to exit and that other lenders may choose to enter into.
To access your funds before the term of the loan, you will need to arrange to sell your loan part via the secondary market. Loan parts can be put up for sale at increments of £25.
You can sell the complete investment in one go or sell the same investment as separate loan parts, set at different amounts and with the added option of applying a premium or discount.
When purchasing a loan part, the buyer is effectively buying the original investment. The interest accumulated during the duration when the seller held the loan part and up to the point of purchase is frozen and remains with the seller until the loan is repaid.
The buyer will start to earn interest from the date the loan part was purchased until the loan is repaid.
The secondary market will automatically remove or prevent lenders from selling a loan part that is in the fifth month of a six-month loan term.
Premium and Discounts can be added to the sale and are set in increments of 0.1% and is calculated against the amount being sold. The maximum premium or discount is 0.5%.
Risk when selling your loan
The main risk is that you may not be able to sell your loan part within the term of the loan. In such events, you must wait for the loan to be completed.
The interest we pay on your investment is paid gross; no tax is deducted at source by peer-to-peer lending platforms. If you are an individual you should declare any interest or gains to HM Revenue & Customs. Our Lenders are responsible for the payment of any tax due to them to HMRC. The amount of income tax payable is dependent on the individual circumstances and your marginal rate.
If you are in any doubt about your tax position you should speak to your accountant or make an appointment to speak to an adviser.