What a private lender actually tracks on a loan

Ask a private lender what they track on a loan and the first answer is usually the balance. It is the wrong answer, or at least an incomplete one — the balance is an output. What has to be tracked is everything the balance is derived from, and the reason lending operations run on spreadsheets long past the point where they should is that the balance is the only part a spreadsheet is good at.

This is a list of what a funded loan actually carries, why each part is separate, and where each one tends to go wrong. It is written for a private or MIC lender — the kind of operation where the same person might fund a loan on Monday and chase an arrear on Thursday.

1. The terms, as written and as they now stand

Every loan has two versions of its terms: the ones in the commitment, and the ones in force today. On a well-behaved loan those are the same document. On a real book they diverge — a renewal, an extension, a rate change on a variable facility, a further advance, a partial discharge on one of two securities.

The failure mode is quiet and specific: someone works out a payout from the original commitment. The commitment is the wrong document, the current terms live in an email thread, and nobody notices because the number looks plausible. Keeping the loan as it stands, with the history of how it got there, is not administrative tidiness — it is the thing that makes a figure defensible.

• Principal advanced, and each further advance with its own date
• Rate, and whether it is fixed, variable, or fixed with a reset
• Compounding and the day-count basis — both are terms of the loan, not conventions
• Payment amount and frequency, and whether payments are interest-only
• Maturity, and every extension that has moved it
• The security, and what has been discharged from it

2. The payment history, not the payment schedule

A schedule is what was supposed to happen. A history is what did. Most spreadsheets hold the first and infer the second, which works until a payment arrives late, arrives partially, arrives twice, or arrives and is applied to the wrong loan.

What matters is the application: for each payment received, what it paid down and in what order. Interest first, then principal, is the usual order, but a loan in arrears may have accrued interest, default interest, and costs sitting ahead of principal in the queue. If the application order is not recorded, it cannot be explained later — and a borrower's solicitor asking why a payment reduced the balance by less than expected is asking exactly that.

1. 1The date the payment was received, which is not necessarily the date it was due
2. 2The amount, and whether it was short, exact or over
3. 3What it was applied to, in order, and what was left outstanding after it
4. 4The balance it produced, as at that date

3. The dates that move on their own

A loan has dates that are fixed at funding and dates that move without anyone touching them. Maturity is fixed until it is extended. But the next payment date advances, arrears age, a renewal notice becomes due a set period before maturity, and an insurance binder or a tax instalment expires on its own schedule.

These are the things a spreadsheet cannot do, because a spreadsheet has no opinion about today. Someone has to look. The practical consequence is that the quality of a lender's servicing is often just a function of how conscientious one person is about opening a file — which is a fine system until that person is on holiday.

4. The investors, and what they are owed

This is the part most general-purpose loan software leaves out, and it is the part that distinguishes a private lender from a bank. The lender is not lending its own money, or not only its own money. Behind a funded loan sit one or more investors, each with a share, and each of whom is owed a proportion of what the borrower pays.

That creates a second set of records with its own arithmetic: who holds what percentage of which loan, what has accrued to them, what has actually been distributed, and what is still owing. It has to reconcile against the borrower side — money in from the borrower, money out to the investors, and the spread that belongs to the lender — and it has to survive an investor holding positions in eleven different loans at eleven different percentages.

5. The exceptions

An exception is anything that did not go the way it should: a payment that did not arrive, a payment that arrived for the wrong amount, a direct debit that failed, a rate that should have reset and did not, a document that was promised as a condition and never came in.

Exceptions are not the same as arrears. Arrears are a state of the loan; exceptions are a queue of work. Treating them as the same thing is why lenders discover in month four that a condition from funding was never satisfied — it was not an arrear, so it was never on anyone's list.

6. Who did what, and when

The last one is the least interesting until the day it is the only thing that matters. Every change to a loan — a rate amended, a payment reversed, a maturity extended, a balance adjusted — should carry who made it and when.

This is not about distrust. It is that a wrong number and a right number look identical, and the only way to work out which one you are looking at is to see how it got there. A file without a history forces you to re-derive it from the documents every time somebody asks, and re-deriving it is where the second error gets introduced.

The pattern underneath all six

Each of these is straightforward on its own. A spreadsheet can hold any one of them well. The difficulty is that they are not independent: the payment history determines the balance, the balance determines the investor distribution, the terms determine how the payment is applied, and the dates determine whether any of it is late.

When they live in separate places, keeping them consistent becomes a job — and it becomes a job that has to be done perfectly, forever, by whoever is available. That is the point at which a lending business stops being able to grow on the system it has, and it usually arrives before anyone notices, because nothing visibly breaks. The numbers just quietly stop agreeing.