After almost a year of IT development and scurrying about Squirrel Money has been licensed by the FMA to be a peer-to-peer lender. Squirrel Money will connect borrowers and lenders together and offer a lower cost alternative to bank loans and credit cards. Unlike other P2P offerings in the market, we aren't funded by a bank to deliver a bank-style offering. All of our loans will be authentic person-to-person loans. We're excited about bringing some competition, and better and more innovative consumer propositions to this new market. Getting the license is a key milestone for us, but we are still busy under-the-hood and wont be ready to launch for another 6 weeks.
Squirrel Money will lend up to $70,000 to consumers. We will have a simple flat fee of $250 for unsecured loans and $500 for secured loans. Borrower interest rates will be set by a market bidding system (another NZ first) that will reduce funding costs. Interest rates will respond quickly to changing market conditions and as a result we expect to see borrowing rates reduce. Our estimate is that borrowing rates will average between 9%-12% and in this low rate environment they could get as low as 7.00% for 'A' grade Borrowers. Ultimately Borrower rates will depend on Investor demand. Our target market is homeowners and young upwardly mobile Borrowers - basically our client base - and we think we can deliver you a market leading proposition.
Squirrel Money will be the first peer-to-peer lender in NZ to use a reserve fund. Our reserve fund called Loan Shield will protect Investors from the risk of individual loan defaults. In essence we charge a risk premium that varies depending on the risk grade of the Borrower. This is paid into the reserve fund to cover credit losses. When a Borrower misses a payment, Loan Shield steps in and covers the payment back to the investor. Squirrel Money is seeding Loan Shield to ensure there is sufficient reserves from day-1. If the reserve fund is depleted then the loss is socialised across all Investors by diverting all Borrower interest payments in the fund until it is replenished. Provisioning for defaults and managing as a pool reduces uncertainty for Investors. It also simplifies investing as you don't need to invest small amounts incrementally across a large number of loans. Squirrel Money will charge a 2.00% management fee on loan balances which is deducted from Borrower repayments. By charging it on the balance rather than the amount repaid we remove the risk of lower Investor returns when Borrowers pay their loan back quickly. This was in response to Investor feedback. Investors should earn a net return of between 6.00% to 8.00% compared to bank term deposit rates of around 4.00%. But we won't know for sure until Borrowers and Investors start bidding into the platform. Then we'll quickly see where the market price settles.
A secondary market is critical if we are to not have a corporate funder involved. Squirrel can settle loans immediately and then pass them back to the market for Investors to buy. It will also allow Investors to sell a loan to another Investor via the platform provided the term and rate can be matched. This will create more liquidity for Investors. Bring on September.