How is an investment affected when a payment gets missed on a Squirrel loan?

Financial Planning Written by Squirrel, Apr 22 2022
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If you’ve invested through the Squirrel peer-to-peer lending platform, you’ll be aware that on the other side of these investments are loans taken on by other Kiwis, borrowing through Squirrel. When these borrowers apply for a loan, they’re put under the microscope and must fit some strict lending criteria before our Credit team will push go on the loan.

But what happens if a loan payment gets missed?

This is known as a ‘credit event’. This situation is relatively rare for borrowers in our Home Loan and Construction Loan investment classes, but a little more common with our Personal Loan investment class.

To throw some light on exactly what happens, let’s explore a real-life example.

On 1 April (no fooling here) a progress payment for a Construction Loan was listed on the Squirrel marketplace. The borrower behind this loan had missed a scheduled loan payment a few weeks earlier because of an admin oversight, but they repaid the dishonoured amount following day.

Here’s how it played out: 

  • When the payment was missed in March 2022, the Construction Loan Reserve Fund kicked in and made the payment to investors on the scheduled date.
  • The borrower then made their loan payment the next day, which was directed to the Construction Loan Reserve Fund, which squared things away.
  • The progress payment was made to the borrower and listed for investors on 1 April and had been fully passed on to investors by 12 April.

All Home Loans, Construction Loans, and Personal Loans regardless of whether they have had a credit event or not continue to benefit from support provided by the relevant reserve fund.

Investors are made aware that an investment has had a credit event 

Investors who are offered the opportunity to invest in a loan that’s had a credit event are notified about the credit event via email or in the mobile app and must either accept or decline the investment. This is a condition that was mandated by the FMA when they approved our application to operate a secondary market on our peer-to-peer platform. 

If no action is taken, the offer expires after 24 hours and the investment order is then matched to the next available loan.

To give some context, here are some stats from the platform from the example above:

 

Total offers

Offers accepted

Offers declined

Expired offers

Investment orders

276

48

31

197

Proportion

100%

17%

11%

72%

 

The obvious question you might have is: is there a higher risk associated with an investment in a loan that has a credit event?

For investments with Squirrel, the answer is actually no, because all loan losses are socialised across all investors in that investment class by way of the Reserve Fund. If you’re investing with other organisations, there may be a different answer, but thanks to the protection offered by Squirrel’s reserve fund model, the risk of exposure to any individual loan default is shared by all investors in the investment class.

The upshot is that if you see an email or are notified in the app about a loan with a credit event, it’s up to you to accept, decline, or let the offer expire. It’s easy to take action by just hitting a button in the email or mobile app.

For more information on how the Reserve Funds work and how we manage risk in general, head over to this page.

We can help. Have a chat to one of our advisers.