What happens when a borrower defaults?

It doesn’t happen often, but at times there are few circumstances when P2P loans default. Here’s an explanation of what happens.

Sadly not all business plans work out, it’s a factor of life. Here at EstateGuru, as of today we have managed to keep the default rate at a steady level of 0%. This is because EstateGuru prides itself on two areas of focus:

  1. Thorough due diligence of each investment opportunity
  2. High transparency when guiding investors with P2P lending opportunities

This rigorous examination of business plans, security and viability combined with our investor guidance principles not only provides historically greater returns; but more importantly minimises losses to P2P lenders if they occur.

But what happens should a borrower default?

First, let us explain the process behind a loan default. EstateGuru’s Operations Manager constantly monitors all loans on a daily basis. Should they flag a concern on the part of a borrower they contact them immediately to discuss their situation and ask about how/when they will meet their borrowing obligations. We aim to assist the borrower by any means and should we identify a well-grounded reason for prolonging the loan, then we will assess the opportunity of prolonging. However, in such case EstateGuru can apply an additional +3% annual interest for all investors of the loan.

EstateGuru loans being secured by real estate is an additional protection for the investors, as all their investments are secured by real estate at all times. Should the borrower not be able to meet their obligations within 45 days, legal preparations are begun by our local top legal partner who acts as a security agent. After 60 days, the security agent will be legally able to start the legal process for realization of the collateral and the auction process for selling the collateral property will begin. The price for the collateral property shall depend on the current market situation.

EstateGuru has created thorough default plans for each country we operate in that are reflective of local market conditions and legalities – our network utilises professional legal representatives to cooperate with us in ensuring the borrower is back on track meeting their obligations.

Thus ensuring that whenever a default should occur, EstateGuru has established a thorough action plan to address it accordingly. Moreover, the required time for the realisation process is difficult to estimate, as this is an unprecedented issue for EstateGuru and will depend on the market condition. However, we are confident that all the legal procedures are well executed from our side and subsequent case resolution is dependent on each country’s respective legislative processes.

Furthermore, EstateGuru sets the mortgage multiplier for each loan to 1.5 – meaning that EstateGuru can cover potential costs that arise from the liquidation process (for example legal fees). This multiplier is set up as an additional protection for our investors’ funds. Whenever a default occurs investor interest is still calculated for the overdue time so that investors do not miss out on their returns.

That’s great but how does a potential loan default impact my interest returns?

In case of delay in the performance of a financial obligation, the borrower shall pay default interest. This default interest is calculated from the moment the financial obligation becomes due until its due performance, unless otherwise stated in the loan terms.

What this means is that the rate of default interest is the interest rate referred to in the principal loan terms to which fifteen percent (15%) per annum is added.
For example: if the interest rate provided for in the principal loan terms is 10% per annum, the default interest, which shall be calculated from the arrears from the moment the obligation becomes due until it is performed, is 25% per annum.

EstateGuru team will continue to work restlessly towards protecting the investors’ funds. For that, we have applied thorough underwriting and due diligence procedures which will be applicable for each loan application. All loans are assessed accordingly to the most conservative outcome to avoid overly optimistic business models.

Should you have additional questions then please write to us here.

Disclaimer: The values expressed in the article may vary to a minor extent depending on the market.

  • Loit Linnupõld

    How can you say you have 0% default rate when your Katusepapi loan ended in April and the principal has not been returned yet?

    • Kristjan Toop

      Katusepapi development loan was prolonged in April for 2 months, thereby the new repayment date is 20th of June 2017. The investors will be paid an additional 3% interest for their investments for the prolonged period and a respective informative letter was sent to all investors on 20th of April 2017. The borrower has a punctual payment behaviour and all prior payments have been done orderly. Also, the interest payments for the prolonged period will be conducted in a manner that is set out in the initial loan contract. The reason for the prolonging lies in the fact that the refinancing process has acquired more time than initially estimated. However, EstateGuru team has been involved in the process and we are confident that the refinancing process will be finalized during the additional 2 months.
      According to the EstateGuru user terms point 15.2 the portal operator remains the right to extend any due term for payment. Thereby, the loan has not defaulted and all interest payments have been done according to the payment schedule.