While we have hardy systems in place, we can't guarantee that peer-to-peer lending is 100% risk-free. We believe in full transparency so here are the potential pit-falls, so you can make an informed decision. Don't forget to also take a look at how we look after your money.
The risk of borrower default is one of the most significant risks for investors in peer-to-peer loans. Borrower default can happen for a variety of reasons including the borrower falling on hard times, death or serious illness and on occasion fraudulent behaviour. Broader environmental (macro) factors like recessions etc can also factor in..
To help mitigate this risk we have in place our credit decisioning processes, the security that may be associated with the individual loans underwritten, our Reserve Fund model and the ability to socialise any credit losses across all investors in an investment class.
If a borrower defaults on their loan, we can take action to collect overdue payments, which can include using an external collections agency. In some cases it might include taking legal action, including court if necessary. For loans that are secured, collection actions can include the secured asset being repossessed or sold.
In saying that, there's no guarantee that any security available to a loan or our recovery actions will be enough to fully recover the outstanding balance of that loan and the fees associated with the collection of the debt.
The reserve fund model which within New Zealand is unique to Squirrel, has been put in place to help protect your investments in the event of a late borrower repayment or borrower default. Each Reserve Fund is funded by a portion of each borrower's interest rate which is aligned to the borrower risk grade, as well as corresponding modelled probability of default.
The reserve fund is not an insurance product and we can't guarantee or warrant that it will have enough funds available to it to enable you to be fully compensated in either of these events. For information about how our reserve funds operate, including what would happen if a reserve fund was depleted, take a look at our Reserve Fund Policy.
Investments into peer-to-peer loans are fixed-term investments, which means the ability for an investor to liquidate an investment at will is more limited than an on-call investment.
Our platform includes a secondary market which gives investors the opportunity to 'sell' their investments to other investors. The ability to this is completely dependent on another investor being willing to take over your investment for the remainder of its term on the same investment terms, including the interest rate, that you signed up to. If a willing investor can't be found, you won't be able to transfer your interest in a loan and might have to stay invested in that loan for its full term (or until the borrower pays the loan back if they do so earlier than the term is up).
Because of this, we recommend that you make sure you're able to afford to have your money committed for the full term of the loan(s) that you invest into.
Your ability to make an investment into a peer-to-peer loan is restricted by the:
Facilitating enough loans and enough investment funds to fund those loans can be a balancing act, and sometimes one can outweigh the other. While we have an automatic reinvestment facility, the factors we mentioned above will ultimately determine how long it takes to get your funds invested and start generating a return.
If there's a limited supply of loans that meet your investment criteria, your uninvested money could stay in your on-call account for an extended period, until more loans become drawn down.
Lending in the higher interest rate categories typically see high prepayment rates. As mentioned above, our experience suggests that prepayment rates can be in the vicinity of 30-40% per annum for Personal Loans and 20-30% per annum for Home Loans and Construction Loans. This means you might see see a reasonable proportion of the investments you make to fully repay before the original investment term is reached.
One of the key features of our lending products is that borrowers on the platform have the option to repay their loans at any time without penalty and on occasion we even assist the borrower to refinance their loan if that makes sense for the borrower.
If a loan is repaid early, the outstanding principal and interest (accrued up until the repayment date) is transferred to the investor(s) in that loan as soon as the early repayment is received.
The consequence of early repayments is that the investor(s) in those loans have their principal returned before the original investment term expires and they therefore do not receive the amount of interest income that they would have received if the loan had continued for its full term. Of course, investors are welcome to reinvest in new loans to keep their money working for them.
Our platform is entirely online which exposes us to threat of cyber fraud. To keep the risk as low as possible, our IT team have gone to great lengths to make the platform secure, including undertaking periodic external IT security audits. Should a cyber-attack manage to breach our walls, your money has the additional protection of knowing that all funds in the platform are held in a trust and can only be transferred out of the platform using our online banking system with dual signing authority.
As part of our licence to operate, we also maintain a disaster recovery and termination plan and we have insurances in place to protect against both cyber- crime and fraud.
The peer-to-peer industry and legislation in New Zealand are still relatively new and regulators like the Financial Markets Authority and Commerce Commission, and the Courts, are still developing their positions on how to apply the law.
If a regulator were to take a position which is inconsistent with our current practice, it could affect how we currently operate our business and, in an extreme case, like in relation to consumer credit legislation, the ability to enforce loans. To keep on top of current legislation and its interpretation we regularly seek legal advice from experts in this field.
There are lots of conditions that Squirrel has to satisfy to maintain its licence to operate as a peer-to-peer lender. Failure to comply with those conditions could see Squirrel’s licence removed or its conditions changed. We've put a strong governance framework in place and we're regularly audited to make sure we don't breach any of our licensing conditions.
If Squirrel was placed into receivership, we have set aside funds to help manage the run-off of the loan book by way of a bank bond for the benefit of the platforms trustee. This bond (plus access to the ongoing Squirrel margin on Loan repayments) is in place to ensure an appointed third party can continue to administer the collection of borrower repayments and payments to investors until the loan book has run-off.