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Risks and things you should know.

Before investing in a FOLK2FOLK business loan it’s important to familiarise yourself with our General Terms & Conditions. With all investments, there are a number of risks you should be aware of so we’d like to draw your attention to a few things including risk and how we manage it. If there’s anything you don’t understand, or if you have any questions regarding your FOLK2FOLK investment, please contact us.

  • General peer to peer lending risks
  • IFISA specific risks
  • How we manage risk

General peer to peer lending risks

Your capital is at risk

As with many investments, your capital is at risk when lending into a Peer to Peer loan.

Peer to peer lending is not covered by the Financial Services Compensation Scheme (FSCS). What do we mean by this?

This means compensation is not available from the FSCS if a peer to peer lending platform cannot meet its liabilities in respect of its products. Nor do Lenders have recourse to the FSCS for the failure of Borrowers to meet loan interest payments or loan capital repayment.

Risk of failure of FOLK2FOLK

We’re authorised and regulated by the Financial Conduct Authority (FCA) which requires us to maintain a certain level of regulatory capital. This means that there should always be sufficient capital for an orderly wind-down of the company.

If FOLK2FOLK Limited were to stop operating, although there’d be no new loans, the existing loans would be passed to a standby servicing company that would ensure the continuation of administration of existing loans until maturity or until Borrowers repaid.

Interest rate

Our loan interest rates are fixed and set out in the loan documentation applicable to your loan. This means that the interest rate you receive won’t increase or decrease if market interest rates change. Under normal circumstances, your loan investment will provide you with the interest rate paid monthly in equal instalments.

However, if your Borrower is unable to meet monthly payments temporarily, you will not receive your interest payments until they start paying again. Therefore, this investment may not be suitable if you rely upon the monthly income.The missed interest payments will still be due to you and will rise to a higher interest rate (see General Terms & Conditions) but they will be delayed.

Defaults

If your Borrower defaults and there is an extreme downturn in the property market, there’s a risk of delay in selling the property, against which the loan is secured, to repay your loan. Therefore this investment may not be suitable if you rely upon prompt repayment. The outstanding  amount will be deferred until the loan status has been repaired or (if required) enforcement action concluded with the security being sold.

In the event of a forced property sale there’s a risk that the sale of the security property may not release sufficient funds to repay all the costs of enforcement, outstanding interest and capital sum. The risk of this is reflected by the interest rate. FOLK2FOLK has had very few defaults since we started in 2013 and none of our Lenders have lost any money to date – however past performance is not a reliable indicator of future results. Read more about our defaults record and how we handle defaults.

Interest rate, risk and default

With our secured lending, it is important to consider two aspects of default risk:

  • The chance of the borrower not paying interest or capital. We consider this risk to be fairly similar across our interest rates.
  • If the borrower defaults and the security property has to be sold to repay Lenders, the chance that the proceeds won’t cover costs and repay Lenders in full. This risk is higher for our higher interest rates. So, there’s a higher chance that you won’t get all of your money back because the safety buffer is smaller.

Timings

There are no guarantees as to how long it will take to be matched to a loan. It depends upon demand from our Borrowers.

Once in a loan, your Borrower may repay the loan earlier than the anticipated end date. If this happens you can choose to go back on the Lender waiting list.

Accessing Your Money

FOLK2FOLK loans are illiquid assets which means you cannot exit them quickly. You should be prepared to hold your loan investment until maturity. As a Lender, you have the right to offer your loans for sale via our secondary market ‘MarketPlace’ but we cannot guarantee a sale. Fees apply.

If your investment loan were to fall into arrears or default you cannot offer your loan for sale on MarketPlace. You will need to wait for the loan situation to be repaired or the defaulted loan recovered.

There is no right to cancel your investment in a loan since it is an agreement secured on land.

Spreading your risk

If you have sufficient funds, you can diversify your risk exposure by spreading your money over a number of loans, rather than concentrating them in one. Currently, the minimum amount that can be invested into a single loan is £20,000.

We don’t give advice

It’s your responsibility to assess whether lending via FOLK2FOLK is suitable for you, with particular regard to your individual risk appetite and personal financial circumstances. We’re not able to advise you on the appropriateness or suitability of any loan. We recommend you take advice from an independent financial advisor if you’re in any doubt as to whether investing in a peer to peer loan is right for you.

IFISA

General

FISAs are not the same as cash ISAs. The risk of investing through a Peer to Peer platform is higher and there’s no guarantee that your capital or interest will be repaid.

You can invest your annual ISA allowance of £20,000 in tax year 2019/20. Once a new tax year starts you will have a new allowance to invest. The date we receive your funds is the date on which your ISA subscription starts.

Interest

Interest is paid to you tax-free monthly to your specified bank account. Interest earned on the IFISA can’t be accrued inside the IFISA so if £20,000 is invested, the investment amount at the end of the term will remain at £20,000. Bank interest is not payable, and loan interest is only payable if your funds are invested in a loan.  Learn more about tax and return.

IFISA Timings

Timing to start earning tax-free interest is dependent upon eligible loans being available and there are no guarantees as to how long it’ll take to be matched to a loan. There’s a possibility funds won’t be matched in that tax year, in which case your funds will still retain their tax-free status within the IFISA wrapper but no interest will have been earned.

How we manage risk

Secured loans

All loans are secured against UK based land or property. We do not offer unsecured lending which is more risky than secured lending.

Max 60% Loan to Value

We only lend up to a maximum of 60% of the Market Value of the security.

Valuations

From February 2019 we started using Market Values instead of Forced Sale Values for new loans.

Professional Indemnity Insurance

We carry Professional Indemnity Insurance. As part of our processes, we take advice from external solicitors and valuers to assess the proposed security property and we check these professionals have Professional Indemnity Insurance.

We’re choosy but fair about Borrowers

We take an holistic view of Borrowers, businesses and the security property and turn down those that don’t meet our criteria.

 

Stress testing

Loans arranged through FOLK2FOLK are secured against UK property assets and we take a traditional and conservative approach to the valuation of the security and the leveraging of Loan to Values.

Our loans are subject to an internal annual review to ensure the original transaction is on track.  We are ever mindful of the external influences that could undermine our Lenders’ investment such as falling GDP, lowering of interest rates, sector stability, current political environment to name a few.

Due to the secured nature of our business, a key area we monitor is a fall in property asset values and we look at this on a sector and portfolio basis.  We undertake a regular review of property values and apply the Bank of England 2018 stress test.