Return and Risk of P2P Loans

We offer credit investors a transparent picture of the earnings expectations and risks associated with P2P and corporate loans. Investors receive real-time information about market interest rates and credit losses as well as the opportunity to analyze their portfolio with various software tools.

Investment income

Investment income

The income of the investor, i.e. the lender, consists of the interest on the borrowed capital. The level of the interest rate follows from the offer that the investor makes to the borrower. The choice of lenders automatically falls on the cheapest offers. However, the borrower decides for himself whether to accept an offer or not. A market-oriented borrowing rate based on the balance between supply and demand enables the offer of competitive P2P and corporate loans as well as good earnings opportunities for investors. The average annual return on credit investments to date was 7-10%.

Compound interest for investors

The monthly interest and repayments can be continuously invested in new loans with the help of our automatic asset manager. In this way, the investor benefits from compound interest effects in the shortest possible time. In other words, he not only receives interest on his original capital, but also on the interest itself. Example: An investor invests $ 200 a month in loans. With an annual return of 10%, the invested assets will grow to more than 40,000 USD in 10 years, although the investor has only invested a total of 24,000 USD.

Credit Investment Risks

Credit Investment Risks

Lenders must be aware that investments always involve the risk of losing capital. This also applies to P2P loans and credit-based crowdfunding of companies. The credit risk arises from the fluctuations in earnings compared to expectations. The individual aspects relevant to the lender are the solvency of the borrower (credit risk), the deviation of the return from expectations (interest rate risk), the speed at which the investment portfolio can be sold if necessary (liquidity risk) and fluctuations in exchange rates during the credit period (exchange rate risk ).

credit risk

In order to keep the risk associated with the borrower’s solvency as low as possible, the total investment should be spread over a large number of loans. To minimize the credit risk, it is advisable to diversify into at least 100 different loans, so that no more than 1% of the capital is accounted for by an individual borrower in the respective credit market. According to the prevailing view, this spread has no negative effects on the expected yield, but only reduces its fluctuations.

We check personal data and creditworthiness of all borrowers; for companies, the public credit rating at Finland’s leading credit agency. In our online service, we only accept borrowers for whom no payment problems have been registered. Among other things, we require companies to have the most recent annual financial statements and a good public risk assessment.

Creditworthy applicants are divided into credit rating classes (1-5 stars), on the basis of which the lender can decide for himself what risk he would like to invest with. The more stars, the more certain it can be assumed on the basis of the situation and history of the respective borrower that he will repay the loan in full and in full. Our statistics provide information about the payment behavior of the credit rating classes by market area.

Additional protection against credit risks

For Finnish, Danish and Polish peer-to-peer loans, the investor’s credit loss risk is limited by the sale of overdue loans to debt collection agencies. P2P loans are currently sold at a price of 53% (Finnish) and 30% (Polish) of the remaining debt. Finnish consumers are also given the opportunity to take out voluntary credit insurance in the event of unemployment, chronic illnesses or death in cooperation with the world’s largest insurance company AXA. To minimize the risk, corporate loans in turn include at least the personal guarantee of the entrepreneur and usually also real security such as real estate or corporate mortgages.

interest rate risk

We have a fixed rate of interest on all loans, which eliminates the usual risk of fluctuating market interest rates when investing in promissory notes. The only interest rate risk of our service is that a borrower saves interest by repaying the loan early. For the lender, this of course also means the advantage that he gets his invested capital back faster and can invest otherwise if so desired.

liquidity risk

The liquidity risk of the loans brokered by us is reduced by the possibility of being able to sell them to other investors on the secondary market if necessary and thus to be able to liquidate the tied-up capital.

Exchange rate risk

There is an exchange rate risk when granting loans to countries with a different currency, as the rate at the time of repayment may be different than when the loan agreement was drawn up.

Return on Investors In our operational history, investors have achieved an average annual return of approximately 7-10%.

The return for investors shows a return index calculated according to the TWR method (time-weighted return) for all fellow finance services. The value of the investments defines an open loan capital minus any loan defaults. The loan loss provision is calculated daily on the basis of the repayment delay, the realizable value and the risk classification. In the period 7/2014 – 11/2016, the loan loss provision was estimated retrospectively based on the changed calculation. The historical return on the service is not a guarantee of future returns. The chart does not contain dividends.

Distribution of investors’ annual income

Yield in% indicates the annual return on invested capital [in the distribution of the annual return curve for investors]. The calculation formula takes into account the interest received, the realized credit loss and the current loan capital minus the estimated future credit loss of the current loans with late payment. Investment portfolios that exist for longer than 3 months and whose investments have been spread over more than 100 loans are taken into account.

Steven Bailey

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