Understanding the Lender Marketplace - Part 2: Loans, interest, and repayments

This three-part series provides a behind-the-scenes look at how marketplace lending works at Growth Street.

The Lender Marketplace

In part 1 of this series, we examined how investors and borrowers are matched on the Growth Street Marketplace. UK companies make requests to borrow money, and investors make money available to lend in return for interest. The Exchange is a system which matches these requests, or Orders, on a dynamic marketplace. The result is a loan from the investor to the borrower, and a contract to repay that loan with interest.

Loan operation

Every loan made on the Growth Street Marketplace is due in 30 days. Until it is repaid, a loan accrues interest daily at the rate specified in the contract, and that interest is due to the investor when the loan is repaid. Loans also accrue two other charges:

  1. A Risk Rate (between 0.5% and 7.5% per annum*) - This rate is set by our credit team, based on the creditworthiness of the borrowing business. Risk Rate charges are collected by Growth Street Provision Limited, which it uses to protect investors from losses. We’ll cover more about the provision, and how Risk Rates are determined, in the third and final post in this series. However, you should know that the Loan Loss Provision we offer does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The fund has absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Loan Loss Provision when considering whether or how much to invest.
  2. The Platform Fee (1.0% per annum*) - This is paid to Growth Street Exchange Limited to cover platform operations.

Together with the Lender Rate at which the loan was matched (see part 1 of this series), the sum of these rates is the Total Rate the borrower pays for the loan.

Loan rates example
An example borrower, with a Risk Rate of 3.0%, is matched with an investor for 6.31% per annum (6.5% AER), for a Total Rate of 10.31%*.

When a borrower repays, interest and charges across all outstanding loans are paid first. If the amount repaid is less than the total balance outstanding, the accrued interest and charges will be paid before any principal is repaid. If a repayment is not enough to clear the borrower’s accrued interest and charges balance across all outstanding loans, no principal would be repaid.

It is worth noting that there is no penalty for borrowers in repaying early. GrowthLine, the facility available to borrowers, is intended to be flexible like an overdraft. With a GrowthLine you can borrow and repay at any time, and only pay for what you use. As a result, early repayments do happen regularly. In November 2016, 18% of all loans settled were repaid early.

As an investor, you can set instructions to automatically reinvest any repayments on the marketplace. If instead you wish to withdraw your money once your loans are repaid, simply set your instruction to not reinvest, and your money will be available to withdraw as soon as it is repaid.

A dynamic marketplace

When you borrow with Growth Street, as long as your account is in good standing (we’ll cover the details of how we assess credit in part 3), you are under no obligation to repay the money you borrow before your agreement for a facility comes to an end (typically after one year, but can be renewed). However, investors are always matched with borrowers for 30-day loans. If a borrower wishes to borrow for more than 30 days, loans are automatically cycled back into the Marketplace when they are due but not fully repaid.

The 30th (and final) day of a loan is called the Repayment Date. If the borrower does not repay in full on this day, a new Order is sent to the Exchange on behalf of the borrower, requesting a new loan. This Order is for the remaining balance on the existing loan, including any interest and charges accrued and unpaid. Once the Order has been matched to a new loan, any investors who were due payment on their loans are repaid by the new loan, and a new 30-day loan cycle commences. We call this process “rolling over” a loan.

The result is a dynamic marketplace, where money is constantly moving between borrowers and investors. We’ve designed this system so that borrowers can access money quickly when it is needed, repay it when it isn’t, and investors can earn a return while seeing their risk diversified across a variety of pre-approved borrowers.

Example Roll Over
An example of a loan rolling over after 30 days. In this example, the borrower is matched for a total of £50,000 in loans to two investors. On the 31st day, £250 of interest has accrued, and the first two investors are repaid by two new investors, who start with new 30-day loans to the borrower.

* Rates are quoted to borrowers on an per annum basis, and interest accrues daily at 1/360th of this per annum rate. Rates are quoted to investors on an AER basis, which stands for annual equivalent rate. AER assumes that you keep your money invested for one year, and continually reinvest any interest you earn

This is the second instalment in our series covering the Growth Street Marketplace. The first instalment covered the Exchange and how loans are matched. The final instalment will cover Growth Street’s approach to handling credit and risk management, and how we work to protect investors. If you have any questions please don’t hesitate to reach out to product@growthstreet.co.uk.

Your capital is at risk if you lend to businesses. Lending is not covered by the Financial Services Compensation Scheme. Please read the full risk warning here.

Written on in Product
Head of Product