Tuesday, 6 August 2019

My First Loan Default


After almost a year of investing I’ve just experienced my first Peer to Peer loan that has defaulted with the borrower filing for bankruptcy.  I always knew this day would come, however I believe I’ve prepared well to wear whatever the final outcome may be.  The loan in question comes from my first investment platform TruePillars.  While this maybe my first default, having directly invested in over well over one hundred loans across multiple platforms, I’m confident I will experience it again. 

This particular loan I actually only purchased a few months ago on the secondary market and only received a couple of payments before the default.  While this is disappointing, we need to put this in perspective.  The investment only made up 0.2% of my TruePillars portfolio of just over one hundred loans and the total outstanding value of this loan is about a fifth of the interest I earnt last month on the other loans on TruePillars.

Having not gone through the process first hand, I thought it was a good time to go back over the process to understand the next steps.  From the loan dashboard the notes outline the borrower has petitioned for bankruptcy and as is now in a formal process we must wait for the bankruptcy trustee to provide an update.  For this particular loan, we were an unsecured creditor so we expect to incur a material write-off (i.e. expect to lose some or all of our investment outstanding).  From this point, it will sit on our list of loans until a final outcome is determined.  I’ll keep you posted on how that looks.

While this is the outcome of this loan, I see that TruePillars have several options available to them as described in the PDS (Product Disclosure Statement) to work with the borrower for the best outcome for all parties.  This may include extending the final maturity of the loan by up to three years (lower’s the monthly repayments of the borrower to improve business cash flow which will allow it to continue to operate).  If this does not seem like a viable option, TruePillars may agree to a partial payment in full and close the loan (with material losses) or assign it to a third party (again with material losses to investors).

This default has hammered home the point that diversifying your loan portfolio is extremely important to ensure you minimise your risk and enable you to remain profitable in the event of a loan default.  Although I have focused on the process of what happens from an investor point of view, I think it’s important to take a moment and acknowledge that this can’t be easy for the borrower.  In this particular case, it was a small business owner who has just lost their livelihood.  For me, it certainly puts it into perspective that all I lost was a small part of a larger income producing portfolio.

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