Currently, there is a lot of panic. This is very evident when looking at the stock market. Stocks are down in all parts of the world. The panic has started from the Coronavirus or Covid-19. But how does the coronavirus affect P2P lending?
P2P lending is seeing a massive withdrawal from investors. Platforms which normally has a low amount of loans available how has a lot of loans available. Platforms with secondary markets is also seeing a lot of loans for sale. Mintos now has +1.500.000 loans available (normally at ~400.000).
The panic is not made of a financial crisis such as the 2000 and 2008 financial crisis’. So let us take a look at how this decease is impacting the P2P lending investors and platforms.
Background On The Reactions We See On Coronavirus
The coronavirus has a worldwide impact on the economy. Governments are closing down, production and serviced are shutting down and people are losing their jobs. A very tragic event.
When people are losing jobs they need their money for mortgage payments and groceries. This means from an investor perspective that investors will withdraw their money and more people will be obtaining new loans.
The Investor’s Perspective
When market panic starts raising a lot of people starts to sell their investments to try and save the profits they have gained. This can easily be seen from the S&P500 posted in the picture below.
When people start to sell off their stocks the price starts to drop. In P2P lending the loans start to get illiquid. This means that the investors who managed to sell their loans first can withdraw their money, while the investors who is selling to late will be stuck with their loans.
When all the investors start to sell with no buyers, the only way to withdraw is to wait for the loan term to end.
The reason investors want to withdraw their investments is because they are getting unemployed or gets afraid of the situation and panic sell.
The Borrower’s Perspective
People that obtain personal and short-term loans tend to obtain/extend the loans, making it some kind of monthly budget. This can be seen on loans posted on Mintos, as the one below.
When people are already living paycheck to paycheck with the need for loans to keep their lives running normal, layoffs and financial distress like coronavirus does can require them to obtain additional loans.
It is very clear for any investors following the P2P lending market that there is a lot of new borrowers looking for funding of their loans. On Mintos’ primary market there is normally ~100.000 loans available. However, currently there is above ~800.000 loans available.
Mintos is even announcing that 1/3 of all loans is offered with 14% interest. Taking into consideration that the average return this last summer was below 10%, this is a significant improvement. However, this must also mean that either it has become more expensive for borrowers to lend money, or the loan originators are giving up profits to attract investors to fund the loans.
Giving investors a higher return is fine, but if borrowers are paying more in interest it can lead to an increase in defaults as the borrowers now has to cover the additional costs.
This increase in interest rate is not only available at Mintos. P2P lending platforms Lendermarket and Swaper have both increased their interest rate 2%. Lendermarket has increased its interest from 12% to 14%. Swaper has increased their interest rates from 12% to 14% and with their loyalty bonus from 14% to 16%.
P2P Lending Platform’s Response To Coronavirus
EstateGuru has made a good description of how they are going to protect the investors’ funds. Besides a relatively low loan-to-value of 60%, EstateGuru has a good historic performance due to their strict due diligence. EstateGuru has made stress tests of their investors’ portfolio and claims that investors will be able to handle the hectic times.
Mintos has removed the 0,5% cashback for newly referred investors effectively from the 25th of Marts 2020 to safeguard the investors on the platform. Mintos says it is expected to return to normal when the coronavirus is gone and the global economy is back to normal.
BitOfProperty has taken some measures to make the management of the properties easier and more secure. This is done by handing over the management of the properties to Goodson & Red. Furthermore, BitOfProperty is monitoring the rental market to follow rent adjustments (only if needed), to make sure the properties will not be vacant. Furthermore, they are monitoring the situation together with Goodson & Red using their experience to guide the course of action.
Grupeer has made a vague statement: “Let’s keep a calm approach and think long term”. Grupeer assures that the best approach is to be calm and remember that they will continue the 12%-14% interest rates as before the coronavirus outbreak.
Fastinvest has sent an email to all their investors that they will continue business as usual. They say they have the technology and resources to carry on without interruptions or delays.
Iban says they are 100% digital and cloud-based making their operations no different from before the coronavirus epidemic.
Impact On P2P Lending Investors
If the loan originators is giving up profits to attract investors it could be a sign that buyback guarantees are leveraged way to high (which I will guarantee you they are anyway). In essence, if the borrowers start to default the loan originators will have to purchase the loans back as always. However, with the potential increase in defaults, some loan originators do not have the financial stability to do so.
This means that loan originators are forced to push more investors into their platforms to fund the loans. Otherwise, the loan originators have to fund the loans while struggling with buyback guarantees.
The current situation is very unfortunate and there is not much that can be done from the platforms, other than learn from the situation. Hopefully, the different platforms and its loan originators have had the time to get their financial stability in place to right out the wave of the coronavirus and the potential financial aftermath. If the platform(s) and loan originator(s) has not gotten their financial stability in place, you could as an investor be looking forward to losing money.
Platforms like Mintos and EstateGuru who has okay financial health and done something to try and lower their expenses might be in the lower risk category. However, platforms that has no public information on financial status or taken measures to protect investor should not be entered. You can check my post on P2P lending platform ratings. I have included financials as a part of the risk evaluation.
How To React As An Investor To The Coronavirus
There is different ways to react to market crashes. In the stock market, many panic is selling and others start to purchase more. This is also the case for P2P lending. Platforms with secondary markets are seeing an explosive growth of loans posted to the secondary market.
The right thing to do is evaluate your own situation and examine how you think the future is going to turn out. If you believe a financial crisis/total recession is going to hit, you have to ask yourself “Do I need my invested money for other purposes in the next 2 years?”. If you do need your money within the next 2 years, it is historically a good idea to withdraw from investments and hold cash instead.
However, if you are not in need of your investment funds within the next two years, then you should maybe consider investing more to gather some cheap loans with a high yield to maturity. This can be done through platforms with secondary markets such as Mintos.
2020 has been a rough year for P2P lending. First Kuetzal and Envestio turned out to both be scams. Now a virus is spreading throughout the world, and no one knows the consequences of the panic. Therefore, it could be a good time to rebalance portfolios.
When evaluating the risk tolerance of your portfolio, you have to think about that P2P lending has not been in a global recession yet. This makes P2P lending a very risky investment as there is no history to base decisions on.
Rebalancing your portfolio is a smart move if you think that a too big percentage of your investments is in P2P lending. While the global economy hasn’t put everybody out of their jobs (yet), it might be a good time to remove some of the risks from P2P lending.
In investing it is also important to remember that “funny money” should be allowed. In essence, this is money that you have set aside for risky investments. Furthermore, remember “only invest what you can afford to lose”.
P2P lending is an industry expected to grow at a rapid pace. However, the coronavirus might be able to put a pause to the grow. This is what we see on the secondary markets, people are selling off their loans at big discounts. Therefore, this might also be an opportunity to earn some extra money in time that would otherwise not allow it.
Pick Up Cheap Loans On Secondary Markets
While the market is raging and people are panic selling their loans at big discounts, you can set yourself up for big profits (assuming the borrowers will pay on time).
To simplify what the yield-to-maturity (YTM) is, it is the return on investment as an annual percentage. The reason the YTM is so high is because most of the loans have a very short repayment term, thus giving a big YTM.
Following P2PExplorer’s ratings of the financial stable loan originators might help get some very good returns in the current chaotic market conditions.
Exit Sketchy Platforms
This is a “No shit Sherlock”, but I have to say it. If you are currently on sketchy platforms, now is a good time to get out. Platforms that have very little transparency and is not a part of any bigger organizations should be excited now as their future will be very uncertain. You can use the P2P lending platforms rating to evaluate those risks.
In addition, this also applies to weak loan originators.
What Loan Types Should You Avoid?
The coronavirus is no joke and people are already losing their jobs. This also means that some loan industries will be non-performing in the current situation.
Some Development Loans
A development loan is a loan used for the development of properties. A development loan can cover not just the construction but also the infrastructure of the construction(s) such as sewers. When thinking of private development of properties the individual’s economy has a huge role in whether they are able to repay the loan.
Furthermore, building sites are already becoming empty because there is no buyers for the finished developments. The developers can not afford to have different craftsmen working when there is no buyers of the finished construction.
Furthermore, there is the problems of the different workforces that are not allowed to work on the development sites. In addition, the development sites can face some difficulties in acquiring materials.
Development loans can be a hit or miss in times like these. The development of many projects will come or is already at a total standstill. For the developers with a weak economy, this can put investors at risk.
Unsecured loans are of nature high risk. In general unsecured loans should be entered with caution. However, in the coronavirus times with mass layoffs, unsecured loans are in great jeopardy of defaults.
The unsecured loans you should avoid is both business and personal loans. Any business that can obtain a loan unsecured is most likely in great financial distress already.
Personal loans without security is also in a major risk of default especially for people in the restaurant, travel and alike businesses as they are seeing a huge increase in layoffs.
Some Business Loans
Business loans to restaurants, bars, hotels (also development) or to businesses where employees are required to be working closely with each other should be avoided. Online business models should not be in the same category of risk as a restaurant. However, it is important to access the length of the project and the financial health of the borrower to determine the real risk.
Which Loan Types Are Expected To Do Well?
Now most of the post covers the domes day panic mode of the coronavirus. So are there any loans that should be “safer”? I am glad you asked. Some loans tend to perform better than others in recessions in general. As stated previously P2P lending has not experienced a recession yet. However, using knowledge from previous recessions and best judgment some loans can be deemed safer.
Crowdfunding of Residential Appartments
There is platforms such as BitOfProperty and Bulkestate that offers buying residential apartments. These crowdfunding platforms allows for purchases of single or multiple apartments, which is to be rented to collect rental income and the long-term appreciation of the property value.
Regardless of the coronavirus or a recession people will always need a place to live. People might move in together to save money and the value of the properties might temporarily decrease. However, the rental income will always be there if managed properly.
Property Back Loans
While it is expected that the default rate will increase, missing payments will increase, minimizing losses from defaults has never been more important. One way to minimize losses is to invest in property back loans. The collateral backed by the loans can be sold off in case the borrower defaults, hence a recovery of the investment is possible.
The best way to secure the investment, is to go for low loan-to-value ratings (lower is better). If the collateral is in good condition and the collateral agents manage to sell the properties it can be done without losses for the investors.
A platform which has a very good track record of collecting debt is Estateguru. Furthermore, Estateguru has a very low default rate currently. Which could indicate that their due diligence process is working, also putting less stress on the investor during panic times like these.
Loans Backed By Strong Partnerships
A place where buyback guarantees can work is with platforms or loan originators with good financial health. It is important that when investing in loans backed by buyback guarantees that the backing loan originator has the capital to fulfill their obligations.
Investing at profitable and long-term successful lenders will be in better positions to cope with the potential increasing default rates.
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