The Provision Fund is designed to help protect lenders from borrower late payment or default on an ongoing basis.
RateSetter in the United Kingdom was the first peer-to-peer lender globally to introduce the concept of a provision fund to help protect lenders from financial loss in the event of a late borrower payment or default. This innovation represents a significant evolution in peer-to-peer lending, helping to make peer-to-peer lending simpler and safer for lenders.
The money in the Provision Fund comes from charges paid by borrowers. When a borrower applies for a loan they may be required to pay a periodic charge (Risk Assurance Rate) the amount of which is determined by a number of factors, such as their credit rating from independent credit reference agencies. Amounts paid by borrowers as a Risk Assurance Charge or Risk Assurance Rate are paid into the Provision Fund.
Although the Provision Fund is funded by borrowers, it has been established for the benefit of lenders. RateSetter may in its discretion require the Provision Fund trustee it to pay an amount out of the Provision Fund so that a Lender may be compensated for a loss arising from a borrowers default.