How debt sales can benefit P2P investors
DEBT collection has negative connotations of bailiffs knocking down doors, but it is proving to be a useful way to help peer-to-peer lenders chase unpaid debts and ensure investors can still get a return that is owed to them.
In recent months, Zopa has sold a book of bad loans to a debt purchaser, while Lendy has said it is in talks to sell off some loans that would ensure investors can get some of their funds repaid.
Back in 2016, RateSetter sold £2.1m of bad loans to debt management company 1st Credit, in what was believed to be a first-of-its-kind deal for UK P2P lending.
By selling off bad debts, platforms can ensure that investors get some funds repaid even if they are unable to settle the arrears themselves.
This may raise concerns about the treatment of defaulted borrowers when left in the hands of debt collectors, but the sector has moved on in recent years, with debt collection and purchasing companies operating in consumer credit now overseen by the Financial Conduct Authority.
With regard to its recent debt sale, Zopa said that it had ensured its chosen purchaser treated people “fairly and compassionately while also working towards the best possible repayment outcome.”
Alex Hilton-Baird, managing director of Hilton Baird Collection Services, is one debt collection firm that works with P2P lenders.
“While we are seeing high success rates ourselves, the likelihood of a successful recovery is often dependent on the nature of the debt and the level of underwriting applied by the lender at the outset,” he said.
“With the right partner, it is possible to protect their position and, if they act early enough, this is often achieved without the need to terminate the agreement.”
Many debt collectors and purchasers are also members of Credit Services Association, which has strict standards on how those in debt should be treated.
Its debt-buying members have also agreed to help fund free-to-customer debt advisers.
“Collecting debt is the core business of debt collection businesses, not a P2P lender such as Zopa and RateSetter,” said Iain Niblock, chief executive and co-founder of P2P analysis firm Orca.
“If a debt collection business can recover value from a defaulted loan this is a worthwhile practice.”