As you may already know, no investment is without risk. You should always consider your own risk appetite, and read any Product Disclosure Statement (PDS) and Target Market Determination (TMD) carefully for any investment you consider.
To make life easy, we’ve compiled an overview of the risks of retail lending platforms:
No deposit guarantee
Retail or marketplace lenders aren’t authorised deposit-taking institutions (ADIs). Therefore, your investment isn’t a deposit and doesn’t have the benefit of protection under the Financial Claims Scheme.
Borrower late payment or default
When you invest your money through a retail lender, a borrower or some of the borrowers who have been allocated your funds may delay or stop payment i.e. default on a loan.
If your retail lender is using a provision fund model, like Plenti, you may be protected from some or all of a borrower default by the Provision Fund1.
No provision fund protection
The retail lender you choose to invest with may or may not have a Provision Fund. If it does, a claim may be made on that fund in the event your funds are matched to a borrower that is late in making payments or defaults. However, in some instances, the Provision Fund may not cover all of the default. There is no guarantee nor warranty as to any protection from any provision fund, and as such you may suffer financial loss as a consequence of borrower late payment or default.
Borrower default impact on the availability of the funds
In the event of a borrower late payment or default where you have not benefited from the protection of a provision fund (if available), it may be the case that you can only withdraw your funds relating to that loan when any collections or recoveries have been made against that loan.
Borrowers might repay your investment in a loan back earlier than expected. If a borrower repays their loan early you will earn interest on the amount invested only up to the date that the borrower makes payment, rather than the full term of the lending option you chose.
No withdrawal of funds until end of lending market indicative term
Due to the way lending marketplaces work, you are only able to withdraw (or reinvest) your funds at the end of the indicative term of the lending market.
Think of it kind of like a term deposit: you don’t get to withdraw money until the term is finished.
There are some exceptions to this rule:
- The funds are repaid to you through scheduled payments;
- A borrower repays the loan early;
- You are compensated by a provision fund; or
- The retail lender provides early access to funds by replacing your funds with those of another investor.
Plenti offers an early access transfer feature where investors may be able to request to exit an investment before the end of its indicative term, as long as there are funds from other investors to replace your interests in that loan.
Assignment of your loan
If a borrower to whom your funds are matched defaults on a loan and you are not fully compensated by a provision fund (if available), the retail lender (like Plenti) may assign that defaulted loan to a third party, such as a collections agency, for an amount it is able to negotiate.
Once a loan has been assigned, you may not benefit from any recoveries that may then be made from that borrower.
Differences in borrower creditworthiness
Your investment may be impacted by differences in the creditworthiness of borrowers to whom your funds are matched in circumstances where lenders are not fully compensated by a provision fund (if available) in the event of borrower late payment or default.
Plenti performs a comprehensive borrower risk assessment and lends only to creditworthy Australian-resident individuals and businesses, however, there may be differences between the creditworthiness of borrowers to whom your funds are matched and there may be different risks and different levels of overall risk associated with loans to individuals versus loans to businesses.
Variances in borrower creditworthiness over time
Some retail lenders, like Plenti, assess a borrower’s creditworthiness as at the date of loan application, and the assessment reflects the borrower’s creditworthiness at that point in time.
At Plenti, we do not commit to evaluating a borrower’s creditworthiness on an ongoing basis, although we may do so periodically. Your investment may be impacted should the creditworthiness of that borrower change over time, reducing the borrower’s capacity to repay their loan. In addition, your funds may be matched to the loan of a borrower whose creditworthiness has changed since their loan application was approved, or to a borrower who has been or is late in making payment on their loan.
It’s important that you read and understand the risks associated with any potential investment. If retail lending sounds right for you, find out how to get started here.