How Proplend Determines Lending Interest Rates
Why do interest rates of return differ between investments?
Loan interest rates reflect the credit risk of the underlying transaction – the probability of a loan defaulting. Rates are therefore representations of the creditworthiness of the underlying borrower, the security pledged and the circumstances surrounding the property purchase or refinance.
With all Proplend loans backed by a first legal charge over an income producing UK commercial property, our rates might not be the very highest available, but nor should they be compared to returns for unsecured loans where there is typically increased risk. Nevertheless our rates compare favourably with many unsecured loan rates on the market, with our loans described as “great security and high rates” by a P2P Lending expert.
Indeed, peer to peer analysts, 4thWay featured a Proplend loan as an example investment with higher interest and lower risk. They’ve also described us as 1 of the top 3 property P2P lending platforms.
Similarly, different forms and levels of secured lending have different degrees of risk based on how the security value is expected to fair in less favourable economic conditions. As well as our maximum 75% loan to securing property limit, Proplend has established a number of other requirements to minimise lender risk. The degree to which borrowers exceed these minimum requirements will also be reflected in the interest rates.
Loan-specific factors influencing interest rates include:
- Loan To Value (LTV) ratio;
- Income Cover Ratio (ICR) – the extent to which property rental income covers interest payments;
- Length of leases and credit quality of underlying tenants;
- Track record and credit history of the borrower;
- Additional credit enhancement such as personal and corporate guarantees;
- Property fundamentals such as location and condition and;
- The type of loan product and term commitment. For example 12-month ‘bridge’ loans versus 5-year mortgage-style loans
Market-related factors influencing interest rates
Proplend’s pricing model also takes into account short and medium term interest rate expectations and outlooks for Bank of England base rates, as well as LIBOR (London Interbank Offered Rate) and medium term swap rates.
We also regularly benchmark our lending rates against other lenders to ensure the loan product remains competitive on a like-for-like product basis, comparing rates with:
- Traditional banks
- Peer to peer platforms
- Other alternative lenders
Proplend has structured its fees to align interests with Lenders. The platform charges a ‘Lender Fee’ equal to 10% of the gross interest that Lenders receive. This is only deducted from the income once it has been paid to the Lenders – so we only get paid when they do.
Higher returns are available compared to those offered by traditional banks, with peer to peer platforms taking a relatively modest fee consistent for their role as facilitators of direct lending relationships. The lion’s share of the loan interest finding its way to the actual lender.