But there are ways of minimising both the amounts paid and the numbers of borrowers paying default rates in the first place.
One of the most frequent questions asked of Hope Capital by its investors is: what happens when things go wrong, such as when borrowers do not pay the amount agreed in the time agreed?
Fundamentally the key is to avoid this situation ever arising in the first place and brokers have a key role to play also.
The most important aspect, right at the beginning of the process, is to know your customer. Affordability is key, so thorough investigation to ensure they can afford any loan is essential, be it regulated or unregulated, short or long term, and the plausibility of the exit.
Contact is key
Contact should not stop once a loan has been granted.
Regular contact with the borrower throughout the term of the loan helps to ensure both the broker and the lender know what is happening and whether things are on schedule, particularly if the loan is for a refurbishment or development.
This helps every party to see any problems arising at the earliest stage, so all can work together to avoid arrears.
Often an experienced lender will be able to offer help and advice if an exit strategy or refurbishment isn’t going quite to plan as they may well have seen the same scenario before.
If the worst happens and the borrower cannot pay the loan back on time, where there has been regular contact and the lender understands there is a genuine problem, many will work with the borrower and perhaps extend the loan, often without charging default rates.
If the broker remains involved throughout, they can form a valuable part of this process, working with lender and borrower to help find other exit routes.
For example, if a borrower planned to sell the property but the market has softened so they cannot achieve the price they had projected, it could be that refinancing onto a long-term mortgage could be the best option.
Or the borrower could have intended to refinance but cannot get the loan they need, so need to sell instead.
Sometimes clients just need help or guidance if they find themselves in a situation they are struggling with.
If a borrower has found themselves in a default situation, a quick sale could be a better solution than trying to refinance again to more short-term funding, when the original exit strategy is already stressed.
This approach could help to ensure that the borrower can end up with more equity, rather than additional fees and interest rates, as well as avoiding potential default rates.
Brokers are crucial
Ultimately a loan can, of course, go to enforcement, particularly if a client shuts down and will not communicate or carry out agreed actions, however this is always the solution of last resort as it is expensive and time consuming for all.
The broker can play a crucial role throughout the process by helping their client put a plan B and even a plan C in place just in case things do not go as envisaged at the outset.
The collaborative approach is always the best, and this way most borrowers can avoid ever going into default and can certainly avoid enforcement action.