Understanding loan characteristics is important and no two loans are the same. Being able to identify the differences between loans allows investors to make more informed investment decisions. That’s why at PeerStreet we try to be as transparent as possible and educate our investors about various loan structures and terminology.
Structuring Borrower Payments
One of the primary loan details investors focus on is term. We previously explained how original loan terms may change based on prepayments and extensions. This post will go even deeper on borrower extensions to give more clarity around how they are structured and to highlight what investors should take into consideration when evaluating investments where a borrower has the right to extend a loan (per the terms of the loan documents).
When PeerStreet posts an investment, the maturity date we show on the site is the stated maturity date. However, there are instances where a borrower negotiates an extension at the time of origination, which allows the loan to go past that maturity date. We will communicate to investors whether or not a borrower has such an extension option. This information can be found in two places on the loan details page, as shown below.
Why Do Borrowers Elect to Extend Repayment Options?
When a borrower exercises an option to extend, it does not necessarily mean there is a problem with the loan or the borrower’s ability to repay. It’s also important to keep in mind that a borrower can only exercise an extension option when payments are current.
Often, there is a strategic reason to extend past the original maturity date. For example, the underlying property may be getting refinanced with an imminent closing, or may be under contract (or about to go under contract) to be sold. Additionally, it can be hard to predict exactly when repairs or improvements to a house will be completed. Most homeowners who have dealt with renovations can understand this issue. It could very likely take longer than expected to complete the work, which is not necessarily in the borrower’s control. In those cases, flexible maturities are important.
How Does PeerStreet Handle Extensions?
Extensions may vary in length and number, too, which investors should take note of before selecting investments. We frequently see loans with three-month borrower extensions, but there are also instances where we’ve put up loans with six or twelve-month extensions. Sometimes, a borrower may also have the option to extend a loan more than once. All of these details will be reflected in the loan Loan Details page, as described above. Oftentimes, investors collect extension fees, in addition to ongoing interest payments. So there may be an added economic benefit to investors once the loan gets extended. In all cases, investors will receive updates in the notifications section of their dashboard to stay current on loan statuses.
Historically, less than a third of PeerStreet’s loan investments contained extension options and about a quarter of all loans we’ve put up for investment have paid off early.
If you ever have questions about PeerStreet investments, you can always reach out to info@peerstreet.com and our team would be more than happy to help.
