Suggestion - capital repayment before interest repayment

Irrecoverable capital can be offset against interest income unless and until recovered (at which point it is taxed) so it's neutral anyway I think at the end of the day so long as it's actually become irrecoverable (which is different to Lendy defined "default" - prudent to wait until capital loss is actually suffered).

Timing wise your way would probably be preferable though as it would defer tax until after repayment. It's just not the normal way things are done though (not just in P2P - loan and bond markets in general say interest gets paid first in payments waterfall). There may well be a technical reason why that is the case that I am not aware of.

They are typically anti-avoidance rules in place to stop bonds or loans that are current being easily structured so that one can defer all interest (for example the rules on deeply discounted securities). However, once the bond/loan has defaulted, it can be formally restructured. However, I do think you are correct there is room for some more sensible cashflow structures to be used (more amortizers, perhaps capitalization, zeros, roll-ups, step-coupons etc). I get the impression P2P regs are less flexible on this than securities regs on this. Plus my experience is that many platforms have fairly shoddy analytics that can't cope with these (still very simple) cashflows structures. Finally, many lenders seem to always want a simple monthly income, rather than aiming for cap gains say. 

It's also worth remembering that from the borrower's perspective the cashflow structure of the SS loans is not the same as what the lender receives. On a typical 12-month 12% loan, the fact that lender's receive 1%/month, in arrears, is not reflected in the borrower's cashflow profile. The borrower pays 22% upfront (18% interest, 4% fees) and at redemption they pay a 2% exit fee. So from their perspective it's actually a zero-coupon loan where they receive 78 upfront and pay 102 at redemption (IRR 30.8%). SS has simply created the idea of bullet loan paying monthly, in arrears, as a way to allow SM trading. When I started on SS in late 13, I had the option to take all 12 months interest upfront, at the expense of not being able to trade it on the SM. As an aside, it's the mismatch between the lender cashflow structure and the effective borrower default distribution (which is essentially a jump to default at term) that causes the issues with SM illiquidity. Given the NPV of the loan starts positive but goes negative at it tends to term, nobody in their right mind would hold to term. Variable pricing above/below par is needed to avoid this.