Summary of Squirrel

​Borrowers: Borrow up to $20,000 (unsecured) or $70,000 (secured). 

• Personal Loan - borrow up to $20,000, (unsecured) for up to 3 years with interest rates from 8.95% p.a. and a one-off $250 establishment fee
• Debt Consolidation Loan - borrow up to $50,000, (secured for amounts over $20,000) for up to 5 years with interest rates from 8.95% p.a. and a one-off $500 establishment fee
• Vehicle Loan - borrow up to $70,000, (secured on the vehicle) for up to 7 years with interest rates from 8.95% p.a. and a one-off $250 establishment fee
• Homeowner's Loan - borrow up to $70,000, (secured over an owner-occupied house for amounts over $20,000) for up to 7 years with interest rates from 7.95% p.a. and no establishment fee
• ​Early repayment permitted without penalty.

Lenders (aka Investors): Earn an average return of around 4-7.5% per annum with peer to peer lending.

• Minimum investment is $500
• Loans are personal and secured or unsecured. 
• Squirrel's historical bad debt rate to date is less than 1% over five main credit grades (A-E).
• "Loan Shield", a fund which tops up an investor's capital if a loan cannot be repaid by a borrower helps protect investor funds. This is done at no charge to the investor. 
• Un-invested cash kept in an ASB bank account on trust
• Investors can access their money at any time by selling their loans on the Squirrel secondary market, provided another investor is willing to take over the loan. A 1% fee applies to the value of the loan balance. 
• Squirrel charges a fee of between 1% and 3% of the total capital invested for managing and serving the loan.
• Repayments by borrowers can be withdrawn or automatically reinvested at the desired interest rate. 
• Unlike Harmoney, Squirrel's loans are 100% funded by individuals. The majority of the money Harmoney lends comes from banks. ​

In this guide, we look at Squirrel for Borrowers and Squirrel for Lenders separately to best understand the pros and cons of the offers. Our guide covers:

• Squirrel Background
• Squirrel Review: Borrowers ($3,000 to $70,000)
• Squirrel Review: Lenders

1. Squirrel Investor Returns
2. Squirrel Default Rates and the Loan Shield Scheme
3. Squirrel Borrowing Volumes
4. What if a borrower doesn’t repay a Squirrel loan?

• Benefits of Squirrel
• Squirrel Fees – How fees are charged to borrowers and lenders
• 5 Squirrel Investor Must-Know Facts

Squirrel is the second-largest peer-to-peer lending (P2P) platform to launch in New Zealand. Since its debut in 2015, the platform has allowed retail investors (i.e. individuals) to lend money to New Zealand consumers seeking personal loans. Offering both secured and unsecured loans, Squirrel had lent a cumulative $19m in loans as at December 2017. This may be tiny in comparison to P2P competitor Harmoney (close to $700 m), but there are many benefits to Squirrel.
​
Today, Squirrel has lent to 1,000+ borrowers on its platform. There are four points of difference between Squirrel and other peer to peer lenders:

1. Squirrel only provides personal loans. P2P has been popular with businesses, but the management of Squirrel has decided at this point in time to only focus on the consumer market.  
2. Squirrel offers secured and unsecured loans. 
3. Squirrel offers a loan protection ("Loan Shield") to help protect investors. Squirrel's platform builds up a loan protection fund, contributing on average 2% of every loan repayment. With bad debts expected at a little over 1%, Squirrel uniquely offers some protection for investors should unpaid loans turn into bad debts. Squirrel can offer more accuracy in expected investor returns given the reduced chance of bad debts lowering an investor's capital.  
4. ​Squirrel offers a secondary market for loans, allowing a loan to be sold to other investors if the original investor wants to access their money (and another investor is willing to take over the loan). All other P2P platforms prohibit this, so the only option is to wait for the capital and interest to be repaid by the borrower gradually over the duration of the loan. 

Squirrel charges fees to both lenders and borrowers and does not currently lend any money itself. It acts merely as the middleman by way of providing a platform. This is standard practice for P2P platforms. 

Squirrel’s borrowers are generally individuals wanting to borrow money to repay debt or finance home improvements. Squirrel has a standard application process - only individuals who meet the following criteria can borrow from the platform:

• Be at least 18 years old,
• Be able to afford the loan you are applying for,
• Provide identity confirmation with either a valid New Zealand Driver’s License or a valid New Zealand Passport,
• Provide bank statements for the last three months
• Report acceptable credit scores from the two credit agencies utilised by Squirrel
• You’ll need to list all income sources, your assets (e.g. house, investments, savings etc.), liabilities (e.g. credit cards, personal loans etc.) and your mortgage or rent expenses (separately from liabilities).

Assessments are made fairly quickly, and if your loan is approved you have 30 days to accept it. You will be assigned a credit grade which ultimately decides the interest rate on the loan. The better your credit grade (i.e. A to E), the lower the interest rate. Squirrel offers a fixed rates range for unsecured and secured loans. Specifically:

• Personal Loan - borrow up to $20,000, (unsecured) for up to 3 years with interest rates from 8.95% p.a. and a one-off $250 establishment fee
• Debt Consolidation Loan - borrow up to $50,000, (secured for amounts over $20,000) for up to 5 years with interest rates from 8.95% p.a. and a one-off $500 establishment fee
• Vehicle Loan - borrow up to $70,000, (secured on the vehicle) for up to 7 years with interest rates from 8.95% p.a. and a one-off $250 establishment fee
• Homeowner's Loan - borrow up to $70,000, (secured over an owner-occupied house for amounts over $20,000) for up to 7 years with interest rates from 7.95% p.a. and no establishment fee
• ​Early repayment permitted without penalty.

When a loan application is approved, it is assigned a "grade" with a corresponding interest rate. Squirrel currently offers the following interest rates for secured and unsecured loans:

Whilst providing its own risk profile, investing through Squirrel ​offers another alternative to putting money in a term deposit, corporate bond or an investment in the share-market. The specs are simple - you lend your money directly to other Kiwis looking to borrow, for a 2 to 5 year period.

The most common loan purpose is personal debt consolidation, but a review of the loan requests on any given day will show a diverse range of reasons for borrowing. Loans usually range from $3,000 to up to $70,000 and interest rates charged to the borrower fall between 8.95% and 16.95% (secured loan) and 9.95% and 17.95% (unsecured loan) with the exact figure depending on a borrower's credit risk. 

The platform is not without its risks and rewards, which we discuss in detail below. ​

Squirrel advertises returns up to around 7.5% per annum net of investor fees. 

Who is your money lent to?
Squirrel loans to only qualified and creditworthy borrowers. Specifically:

• Borrowers must be over 18 years of age, have good credit history and the ability to service the loan and be a New Zealand resident.
• Each loan is classified within groups "A" to "E", depending on the individual’s income and credit risk.

Unlike Harmoney or other P2P platforms, investors are not presented with individual loan requests. Instead, Squirrel allocates loans automatically, with money placed with borrowers at a range of interest rates depending on the individual risk profile.

Squirrel launched in late 2015 and is a relatively young platform, so the default rate data doesn’t take into account much more than two years of transactions. To date, the overall default rate sits at 1.3% across all loans. This low number is, however, a life-to-date percentage rather than an annual figure. It is a little distorted by the relatively young age of the Squirrel loan book. The default rate will change in time as the Squirrel loan book matures. Squirrel continues to enhance its credit decision-making process as it is able to analyse more data from its loans.

But, the level of bad debts is less of a risk factor as Squirrel offers something unique to the P2P market - a reserve fund called "Loan Shield". Loan Shield has (to date) protected 100% of every dollar invested in the platform. Loan Shield builds up a loan protection fund, contributing on average 2% of every loan repayment. With bad debts currently below 1%, Squirrel has some funds set aside if unpaid loans turn into bad debts. 

While borrowers are graded A-E depending on their risk profile, Squirrel actively invests in a range of loans over a range of dates on your behalf.

The amount a platform lends is important for two principal reasons:

1. Credit Modelling: The more Squirrel lends, the more data it has to build its credit processes and report to investors. Late 2015 to 2018 is a short period for credit assessment data collection, and as more loans are issued, Squirrel gains more experience in evaluating credit risk.
2. Higher investment opportunities: The more borrowers, the more funding opportunities for investors. The more the platform lends, the greater the probability of new lenders available to fulfil future loans and/or purchase existing loans on the secondary market.

​
Cumulatively, Squirrel has lent $19m since launching in 2015.

Squirrel offers its borrowers both secured and unsecured personal loans. The average value of a loan across all risk categories is $13,500 (unsecured) and $23,500 (secured). The principal risk is a large number of borrowers defaulting on their loan commitments, resulting from negative economic conditions and/or poor credit assessment by Squirrel.

Squirrel aims to help protect lenders in three principal ways:

1. Credit assessment - Squirrel claims to have implemented appropriate systems and processes for determining the suitability of a borrower and his or her ability to afford loan repayments.
2. Security on loans - Security for secured loans generally ranges from motor vehicles to some form of property for the larger loans.
3. Loan Shield fund - Squirrel has established a provisional fund to help protect investors from credit losses of up to 2% over its entire loan book.

Squirrel is in its infancy as a lender. With just over 40 months of data as at September 2019, the platform is still learning.​

If a payment fails, Squirrel charges a dishonour fee (to cover its own credit management expenses) and penalty interest whilst the loan is in arrears (which is ceded into the reserve fund). Squirrel then contacts the borrower to ask for payment – in most cases the payment is promptly made. If not, Squirrel will continue to follow up with the borrower. If three repayments fail, Squirrel reserves the right to engage with its external debt collection agency to take over the collection of the loan.

Loan shield kicks in immediately on repayment default i.e. if an expected repayment is not received, the reserve fund will step in and pay the investor both principal and interest, provided there are sufficient funds available. Squirrel's collections team will get in touch with the borrower immediately to attempt to rectify the situation and when/if payments are caught up, the reserve fund is repaid.  

If the borrower has not arranged for regular repayments of the outstanding debt within 90 days, they are sent to an external debt collection agency. Following feedback from the external agency, the collections team will decide on the next course of action e.g. proceedings and/or write-off.    

All costs associated with the collection of the loan are paid by Squirrel or the borrower and not the lender. This includes debt collection, legal fees and debtor management. You can read more about the investing process here. 

Because of Loan Shield, you will not be notified if a borrower’s loan goes into arrears and/or is written-off. This is because the fund is used to pay back the investors.

Squirrel will only need to notify investors if the Loan Shield fund is not sufficient to repay defaulted loans. In such circumstances, all investors would, in the first instance, receive a haircut on their interest repayments until the reserve fund is replenished. Only in the case that the reserve fund cannot be replenished using future interest repayments alone would investor principle be at risk. Currently Squirrel is putting aside 50-75% above the expected bad debt rate to reduce the likelihood of such an occurrence. 

Investors (i.e. lenders) have the flexibility to get early access to their invested money using the secondary market option on the Squirrel platform, unique to P2P lending in New Zealand. There are fees involved however. An investor will be charged 1% of the loan balance transferred, up to a maximum of $50 per investment. The fee will be deducted from the net proceeds from the money received from the transfer. The success of getting money back on the secondary market depends on the number of investors available to buy the existing loans. If no willing Investors are available, the original Investor may not be able to transfer their interests in a loan and may be required to remain invested in that loan for its full term. ​

Squirrel is not a lender, it is a platform and does not receive interest income from borrowers. Instead, it earns fees from both borrowers and lenders. None of the fees collected are paid to lenders.

Revenue from Borrowers

• Each borrower pays a $250 fee (for personal or vehicle loans) or $500 (for debt consolidation loans) when they receive their funds. 
• A late payment or failed payment levies an overdue fee ($25 every month) and dishonour fee ($15 per transaction) respectively.
• Late penalty interest rate: If a borrower misses a payment and the loan arrears remains unpaid after 5 days, the loan will begin accruing penalty interest at 5.0% p.a. above the normal interest rate.
• Secured loan borrowers also pay $150 to discharge the security used for the loan when it is fully repaid.

 
Revenue from Lenders

• Retail lenders (i.e. individuals investing in Squirrel) pay a "Service margin" – this is up to 3% p.a. of the loan balance and is deducted from gross loan repayment received from the borrower. The percentage depends on the credit risk of the loan, with the annual fee for each category set at 0.95% (A), 1.95% (B), 1.95% (C), 2.95% (D) and 2.95% (E).
• Secondary market - if you wish to redeem your investment before the loan is repaid, Squirrel charges 1% of the balance transferred to a new investor (up to a maximum of $50 per investment)
• Loan Shield helps protect investors. It’s a fund paid 100% by borrowers to provide for bad debt losses and loan arrears. This is for the benefit of investors if loans default. Squirrel reserves the right to assign up to 100% of interest payments received to top up the Loan Shield fund if an unexpected number of borrowers default on their loans.