Key features and risks
Chip is all about helping people make their financial goals happen, and feel good about their money. ChipX CommunityLending takes this to the next level.
It offers community lenders attractive, stable returns on their money whilst helping responsible Chip community members escape expensive bank overdrafts through sustainable low-cost borrowing - SmartCredit.
If you want to know more about what being a community lender involves, read on. This document covers all the key features and risks involved.
And if you take nothing else away from this document, just note when lending your money to the community, your capital is at risk.
Here are some of the terms we’re using, just in case you get lost.
ChipX = our investment product
SmartCredit = our lending product
Borrowers = Chip community members who have borrowed using SmartCredit
Community lenders/lenders = people who have invested their money in ChipX
Community lending = a peer to peer platform that matches lenders with borrowers
1. Who are the individuals you are lending to?
You only will lend to other Chip savers. A typical Chip borrower:
Is in full-time employment
Has an existing bank overdraft facility
Has been a Chip saver for at least 3 months
Has a good credit profile and has not missed any debt obligations
Is at least 18 years old at the time of application
Has no bankruptcies, IVA, CCJs
We market SmartCredit as a way for borrowers to repay their bank overdraft. And we offer SmartCredit to Chip savers that we know have expensive overdrafts.
So, it’s likely borrowers will use the money you lend them to replace their bank overdraft, but we can’t enforce how they’ll use the loan.
2. How are the borrowers assessed?
Every borrower must pass our assessment process before your money is lent to them. This helps reduce the risk of default.
We decide if someone is eligible to borrow using three methods:
Policy criteria help filter out borrowers that have a low likelihood of being approved for finance. For example, we only consider borrowers that are in full-time employment, a resident in the UK and are between the ages of 18 and 72.
Statistical credit models
Borrowers are assessed using statistical credit models that we have developed using publically available data sources (like credit reference agencies) and our own database.
Alongside our credit models and policy criteria, borrowers may be manually assessed by our expert credit analysts.
They reference multiple sources of data; including financials provided by the borrower and leading credit reference agencies, plus the borrower’s Chip data.
3. Key features of lending to individuals
3.1 Initial investment
To help you build a well-diversified portfolio for a more stable return (see below), we suggest lending £1,000 or more.
To start, we will transfer your ChipX VIP funds into your ChipX account. After this, you can move money into ChipX in units of £250.
You transfer money to ChipX via your Chip account. Note, this means you cannot transfer money directly into ChipX from your bank account.
To help you earn a stable return, you will lend small amounts to many different borrowers. This is called diversification.
If any of your borrowers are unable to repay their loan, the overall impact on your portfolio will be much smaller than if you had only lent to a handful of borrowers.
The amount you can lend to an individual borrower varies with the type of lender you are.
|Lender type||Maximum amount you can lend to an individual borrower|
3.3 Matching your funds to borrowers
Once you have moved your money into ChipX and begin lending, we will begin to match your funds to borrowers.
You will not be able to select individuals, or types of borrowers, you’d like to lend to.
3.4 Loan term
The loan term for each borrower is set to 12 months. The borrower may choose to extend the loan for an additional 24 months (providing they meet credit assessment criteria).
3.5 Loan contract
You will enter into a separate contract with each individual borrower you lend to. This is done automatically so you will not have to sign any documents.
As the contract is held between you and the borrower, the borrower will still be liable to repay you even in the unlikely event of Chip going out of business.
Each borrower you lend to will make a minimum monthly interest payment. Chip will collect your interest payment from each borrower and distribute them to your ChipX account.
By default, your funds in your ChipX account will automatically be matched with more borrowers unless you serve notice to withdraw.
All borrowers must make payments on a calendar month basis. So you should receive your interest payment in the first week of every calendar month, for the interest due in the previous month (i.e. each month, you’ll receive last month’s interest).
Borrowers also have the option to make a partial or full repayment of their loan (we encourage them to do this, too). If this happens you will receive your principal amount and any interest earnt.
Your projected return includes the 4.8% Chip platform credit charge. It is calculated on every interest payment made by the borrower and taken directly from the borrowers’ interest payments.
We don’t take a charge if the borrower stops repaying their loans.
This means that by the time the interest reaches your account, the Chip platform credit charge has been applied. No servicing fee is taken from recoveries on defaulted loans.
There are no fees or charges to withdraw unlent funds.
3.8 Accessing your money
You will need to give us 3 working days’ notice to withdraw any unlent funds, and transfer them to your nominated bank account.
Any money that has been lent out to borrowers will not be accessible until the borrowers repay the principal back.
The interest you earn is paid to you before tax and you may need to pay income tax on your earnings.
You should declare any interest to HM Revenue & Customs on a self assessment tax return or inform your local tax office.
For more tax information and how peer-to-peer loans are treated for tax purposes, please refer to our help centre or seek independent financial and tax advice.
5. Risks involved when lending to individuals
Lending to the Chip community can provide you with attractive, stable returns. However, as with any form of investment there are risks involved.
5.1 Late payment
In some cases, a borrower may be late with their repayments. When this happens our Collections and Recoveries team will work closely with the borrower to get them back on track with their repayments as soon as possible.
5.2 Bad debt
When lending to individuals, there will always be a proportion that are unable to repay their loan. This is a normal part of lending and we call it bad debt. We account for an expected level of bad debt in your range of returns.
If a borrower is unable to repay we may default the loan, which allows our Collections and Recoveries team to begin formal recovery proceedings against the borrower.
When a loan is defaulted, the outstanding amount is deducted from your Chip account and counts as a loss, and the loan can’t be sold to other lenders.
Our Collections and Recoveries team will then work to recover as much of your funds as possible. Any money recovered from a defaulted borrower is distributed to your ChipX account.
5.3 Breach of contract
If the borrower breaches the conditions set out in their loan contract, for example by using their bank overdraft, we may default the loan (see above; 6.2 Bad debt).
5.4 Platform failure
In the unlikely event that Chip were to fail or become insolvent we would transfer the servicing and administration role we perform to a third party backup servicer.
All loan contracts are held directly between yourself and the individuals you lend to, so our appointed backup provider would be able to collect and distribute repayments on your behalf.
5.5 Accessing your money that has been lent
You can access your money before the end of the loan term by selling your loans to other investors. We will build this functionality in due course.
There are no fees to sell your loans, however there are restrictions that may prevent you from selling some of your loans (see; 6.1 Late payment and 6.2 Bad debt).
To sell a loan, there must be sufficient demand from investors to purchase the loan from you.
Although Chip works hard to manage the level of supply and demand on the platform, there is a risk of there being insufficient demand, so you may not be able to access your money as quickly as you would like.
6. Financial Services Compensation Scheme (FSCS)
Chip is not covered by the Financial Services Compensation Scheme.
7. Expected Returns and Defaults
Defaults are when borrowers do not repay their loan. The number of defaults will affect your return (see 4. Returns).
|Gross rate of return||9.6% per annum||This is the ‘perfect’ rate of return if none of your borrowers default.|
|Expected average defaults||2% per annum||This is the percentage of borrowers we expect may default.|
|Expected range of return||5.6% to 7.6% per annum||This is the typical return we expect you’ll earn, once defaults are taken into account.|
It’s important to understand that your actual return may be higher or lower than the projected return shown.
7.1 How expected losses are calculated and validated
The expected losses are estimated based on quantitative analysis of market data. Chip does not have an existing loan portfolio to gauge the actual historical losses.
Expected losses on active loans are recalculated by our risk experts every three months. The expected losses are estimated based on quantitative analysis of market data using industry standard techniques.
In the future, we will revise our calculate and assess early arrears data to inform the decision around lifetime expected losses.
7.2 What factors can affect your returns?
Actual performance may be higher or lower than projected
More borrowers may be unable to repay their loans if wider economic conditions were to change, such as during an economic downturn, for example.
In addition, the individual borrowers you lend to may perform better or worse than projected.
The number of borrowers you lend to
As you are lending to your own individual portfolio of loans, not everyone will earn the same projected return.
The return you achieve depends on the loans your funds are matched with, and the more borrowers you lend to, the more likely it is you will achieve the projected returns.
Lending to more borrowers also helps you earn a more stable return by reducing the impact of bad debt.
Your actual return is likely to change over time
The projected return is the annual return you could earn, once all loans have repaid, and recoveries have been received from defaulted loans.
Bad debts do not typically occur evenly over the life of a group of loans, and it often takes time for recoveries to be made on defaulted loans. This means your return is likely to change over time.