Know your loans: What happens when a loan goes into arrears?

When entering into a loan agreement with LendInvest, our borrowers agree to a regular repayment plan over a set period of time, typically between 9 and 12 months. We’re strict on the calibre of our borrowers: they must be professional property investors with a proven track record based on previous experience.

For all loans added to the platform since February 2017, we use a simple ‘traffic light’ system that indicates the current status of each individual loan in an investor’s portfolio. Different statuses are displayed in different colours from green (for On Schedule) to red (Enforcement).

Prevention

At the point of application, applicants are critically assessed by our mortgage underwriters. Chief amongst this assessment is a borrower’s ability to keep up with the monthly interest payments on their loans. Our underwriting team has over 75 years’ sector experience between them, and use some of the best due diligence and fraud detection systems in the market to look at each borrower’s credit history and professional past experience. However, in certain circumstances, borrowers can fall behind on their monthly payments to us. If one or more of these are missed, the loan becomes overdue and ‘goes into arrears’.

Keeping our borrowers on track is fundamentally important to us here at LendInvest. As a responsible lender we like to keep in close contact with our borrowers over the course of their loans, helping them to work out realistic and flexible exit routes that prevent them from going into arrears. We also encourage our borrowers to make their monthly repayments by direct debit to avoid late or missed installments.

Necessary action: within two months

The first action taken when a payment is missed is to issue an immediate prompt to the borrower warning them that swift remittance is required. This happens within days of the first payment being missed. From our years of mortgage lending experience, we’ve learnt that interest payments can fall down their list of priorities as a borrower presses forward with their project. An email reminder at this point is often highly effective – in fact we find that roughly 80% of loans that are overdue at this point will be paid in full by our borrowers, usually within five days.

Should we receive no response from the borrower, we will again contact them informing them that we are now within our rights to increase the interest rate of their loan. If the loan reaches one full month without payment, the borrower is then charged a monthly £100  arrears administration fee.

Next, we may request a report from Equifax, the international credit reporting agency, in order to track any other missed payments the borrower might have had over the time period. This allows us to build up a wider picture of the borrower’s current financial position and to respond to that most effectively to recover funds owed.

Necessary action: after two months

After two months in arrears, the borrower enters a ‘pre-litigation’ stage. The case becomes the specific responsibility of our special servicing team, trained to deal with borrowers who fall behind on monthly interest payments and to devise strategies that help them get back on track. At this point, we gather all the necessary evidence should further action such as enforcement or repossession be required. We may also instruct solicitors in readiness for further action to be taken against the borrower.

In the infrequent event that a loan enters into its third month in arrears without an agreed arrangement in place to resolve the situation, the case may then move into the litigation stage. The borrower is informed that LendInvest is highly likely to instruct solicitors to issue demand for full repayment of the debt.

If no solution is found, further action is then required. This may result in LendInvest appointing a Law of Property Act Receiver to step in to recover the outstanding debt. To find out more about this process, read our next blog in the ‘Know your loans’ series, available here: ‘What happens when LendInvest enforces a loan?’.

It’s important to remember that no borrower wants their loan to fall into arrears. This kind of negative record on their credit profile could be highly damaging for their business as well as their ability to secure funding for future projects. Our years of lending experience demonstrate that it is always in the borrower’s interest, as well as ours on behalf of our investors, to rectify an account in arrears as quickly as possible.

This blog is one in a number of posts that address the transparency of the borrowing process. To read more, click here.