Many P2P lending platforms offer buyback guarantees. The buyback guarantee is heavily discussed in the P2P lending community in regard to the trust and effectiveness it actually has.
A buyback guarantee is a promise that the investors will get their investment refunded in the case of a default or late repayment by the borrower. The way the buyback guarantee works is if a borrower misses repayment for typically 60 days the loan originator will repurchase the loan.
The buyback guarantee offered by the different platforms varies, and it debated whether buyback guarantee is a good thing or a bad thing. I will give a subjective overview of what the buyback guarantee is and how it works.
What Is Buyback Guarantee?
The buyback guarantee is a safety measure made by the P2P lending platforms for the investors to secure their funds in case borrowers are unable to repay their loans.
A buyback guarantee is in essence a buyback program for loans that runs late to a certain extend. Typically the period of buyback will take effect after 60 days. This means that if you have a loan where the borrower is more than 60 days late, it will be rebought by the loan originator. However, the period of buybacks can vary depending on the platform.
The buyback guarantee therefore makes most P2P lending platforms to look risk-free. However, this is not the whole truth. While it does minimize the risk for the investor, the loan originator has to be financially in good health. Otherwise they cannot rebuy the loans.
When the economy is good and the loan originator is thriving the buyback guarantee makes the investments a lot safer, compared to investing in unsecured loans. The main benefit for the loan originators for using P2P lending is so they can fund more loans. In essence, they are not funding the loans however they make investors fund the loans. Loans only have a default rate of 1%-6%, which is very minor compared to the amount of loans the loan originators can issue due to the funding from investors. This also means that the loan originators’ money is more leveraged, and thus buyback guaranteed loans are no safe investment.
How Does The Buyback Guarantee Work?
The buyback guarantee is arranged between the P2P lending platform and the loan originators. Platforms such as Mintos ensure that the repurchase of loans is with accrued interest, while platforms such as IUVO group is not with accrued interest but just the principal. The obligations for the loan originators are therefore different between the platforms.
By selling loans in smaller shares for the willing investors the loan obligations can boost their liquidity and therefore issue more loans. While the loan originators do not fund the loans, they are keeping the enormous profit margin between the loan rate and the rate offered to investors. When a loan is offered to a borrower at a 50% interest rate per year and the investor is offered 12%, the loan originator keeps the 38%.
The loan originators may have some “skin in the game”. This is an expression used to indicate the amount of funds thee loan originator puts into each loan issued on a platform. For example, if a loan originator has a skin in the game of 15%, it simply means they fund 15% of all issued loans. Is this to give an incentive to post proper loans, and not flood the investors with, excuse my French, shit loans.
There is no definitive way or a standard that states how the buyback guarantee should work. This is very dependent on both the P2P lending platform and the loan originator. Viainvest does not have a buyback guarantee on some business loans, and some loan originators on Mintos does not have a buyback guarantee on all loans as well.
Buyback Late Loans
The most used buyback guarantee is the buyback of loans running late. This period is typically between 30-90 days depending on the platform. This type of buyback guarantee is what makes the P2P lending to a “safer” investment, as the value of the principal is theoretically protected. Buyback guarantees which repurchase late loans are not always including the accrued interest in the delayed period.
Buyback Any Loans Any Time
The buyback guarantee that offers to repurchase any loan any time is what makes P2P lending more liquid. The early termination option is highly appropriate for people investing short-term and could need their funds in the short-term. However, it can also put a platform or loan originator in great financial distress in financially unstable times.
Examples of Buyback Guarantees
Mintos: After buyback guaranteed loans have been due for more than 60 days, the loan originator is obligated to repurchase the loan. Some loan originators have to pay interest on the time in which the loans were delayed.
Viainvest: When a buyback guaranteed loan becomes more than 30 days late, it is repurchased by the loan originator. Furthermore, it is possible to terminate long-term loans after 120 days since the investment date.
Fastinvest: Fastinvest is a controversial platform due to reputation and previously hiding the names of their loan originators. Fastinvest has not 1, not 2, not 3, but 4 buyback guarantees or time frames for the buyback guarantee. The time frames are 3, 7, 15 and 60 days. Furthermore, Fastinvest has a money-back guarantee, which is a buyback guarantee for early termination of your investments.
Crowdestor: The buyback fund provided by Crowdestor is an untraditional buyback guarantee, but more transparent. The buyback fund is a collection gathered from the commissions earned on projects. If a borrower is to default Crowestor will compensate the investors proportionally. The benefit of Crowdestor’s buyback fund that the fund’s size is known by everyone.
Lendermarket: All loans are issued by their subsidiary partners. Furthermore, all the loans issued on Lendermarket is protected with buyback guarantees. Whenever a loan is more than 60 days late it is repurchased with accrued interest for the delayed period.
Avoid or Use The Buyback Guaranteed Loans?
It is a matter of risk tolerance and due diligence whether you should invest in loans back by a buyback guarantee. Using risk analysis such as exploreP2P Mintos’ loan originator rating could help to identify the loan originators in good financial health.
Typically business loans and development loans are rarely covered by buyback guarantees. One thing is that business loans and development loans are of a much bigger size compared to personal loan. Another thing is that platforms issuing business loans and development loans are not coming from loan originators with a six-figure loan portfolio. Rather it is typically the platforms themselves issuing 1 to 3 loans per borrower.
Eurocent went bankrupt and had loans of Mintos. Sadly, the investors who had Eurocent loans are still hoping for their loans to be bought back. However, since Eurocent is bankrupt they cannot fulfill their buyback guarantee obligations.
With all that being said, I would recommend going for loans with buyback guarantees. The main benefit of the buyback guarantee is that you will be more likely to get the predicted cash-flow. Furthermore, the loan originators will eat the loss when defaults do happen. It is a way to keep your funds a little safer when investing in P2P lending when considering all the other risks.
Buyback Guarantee Versus Collateral – Which Is Better?
Using buyback guaranteed loans is a matter of risk tolerance and proper due diligence. When investing on a platform using buyback guarantees the best thing is to use the buyback guarantee. If the only option is to choose between not using a buyback guarantee and using it, you are better off using it, if a borrower were to default.
If you have a platform that has both buyback guarantees and collateral the discussion is much different. This is due to one simple reason: if a loan originator goes bust the buyback guarantee has no effect whereas if the borrower has provided collateral, the collateral will still be able to sell.
A platform that does not issue buyback guarantees is Estateguru, however, they ensure to collect some collateral in case of default. Estateguru is a very popular platform and is getting good reviews despite not providing buyback guarantees.
Collateral is therefore much better for the investors because the claim the investors has can be reclaimed. Whereas, a buyback guarantee cannot be reclaimed if the loan originator goes bust because it has no value like a pledged property.