6 Months’ Interest Reserve: How It Works
Some P2P Platforms operate what they call a ‘provision fund’, which is a co-mingled fund to which a lender / investor can make a claim if they lose money through an investment. They are usually used by platforms offering unsecured consumer and SME loans.
Proplend operates a different model, all our loans are secured by a 1st legal charge over a property which is registered at the Land Registry. This provides a form of capital protection for the lenders. If the loan goes into default, the property can be sold and the proceeds will be used to redeem the loan. In addition, we hold an interest reserve for each loan, which covers lenders should a borrower miss an interest payment when it falls due. Both of these are loan specific and not co-mingled.
Every loan that is listed on the Proplend platform has an interest reserve. The interest reserve is funded with 6 months’ worth of interest payments which is deducted from the gross loan amount on the day of drawdown and it is retained by the platform in the borrowers client money account. These monies will only be used to make interest payments to lenders in the event that the borrower fails to make an interest payment when it fall due. If the borrower has maintained their loan in good order throughout the term, the last 3 months interest payments are taken from the interest reserve, so even at the end of the loan term Proplend will still hold a 3 month interest reserve.
The Interest Reserve is only a short term solution, and the outstanding interest must be paid and the reserve account must be brought back to the equivalent of 6 months’ interest as soon as possible. If a borrower misses a payment, Proplend will immediately engage with the borrower as to the reason for the missed payment and whether this can be cured in the short term or whether there is a longer term issue.
Interest payments from the reserve account are made to all lenders, no matter which Tranche they have invested into, for a period of up to 6 months.