Article
2. Oktober 2024
Understanding the terminology and concepts related to loan securities on alternative investment platforms is crucial for making informed investment choices. This glossary offers straightforward definitions of essential terms focused on loan portfolio analysis, platform functionalities, and loan originator assessment. Whether you're a novice or an experienced investor, this resource will guide you through the intricacies of loan-based investments, helping you evaluate risks, maximize returns, and effectively manage your portfolio.
Definition: A financial model that allows individuals or institutions to lend money directly to borrowers via an online platform. This model bypasses traditional banks, offering an opportunity for investors to earn returns in the form of interest. Use: Investors can select loans with varying risk levels and earn interest as borrowers repay over time.
Definition: A subset of crowdfunding where multiple investors provide loans to individuals or businesses. Each investor contributes to the total loan amount, and in return, they receive interest payments. Use: Common for small businesses, real estate projects, and personal loans, with many investors spreading the risk across various loans.
Definition: A method of raising capital by collecting small amounts of money from a large group of people, typically online. Crowdfunding can be for equity, debt (lending), or donation purposes. Use: Entrepreneurs and businesses often use crowdfunding to finance projects, while platforms facilitate investments in either equity or debt-based opportunities.
Definition: A legal entity created to isolate financial risks and protect investors. SPVs hold assets or loans, separating them from the platform's main business, thereby securing investor funds. Use: SPVs are commonly used in securitization to shield investors from the platform's financial risks by holding specific assets or loans independently.
Definition: A feature where the loan originator commits to repurchasing a loan if the borrower defaults or delays payments beyond a specified period (e.g., 60 days). This reduces the risk for investors. Use: Investors can benefit from increased security, knowing that in case of defaults, the loan originator will repurchase the loan and return the invested funds.
Definition: A situation where the loan originator or platform retains a percentage of the loan, ensuring that they share the risk with investors. This alignment of interests is intended to encourage the loan originator to issue high-quality loans. Use: This reassures investors that the loan originator has a vested interest in ensuring the loan performs well.
Definition: A financial institution or company that issues loans to borrowers. The loan originator may sell parts of these loans to investors on a platform, enabling them to fund the loans and receive a share of the repayments. Use: Loan originators play a crucial role in lending platforms, as they manage the issuance, administration, and collection of loans.
Definition: Securities or financial instruments issued by a special entity (such as an SPV) that represent a share in a loan or group of loans. Investors purchase these Notes and receive returns based on the repayments from borrowers. Use: Notes allow investors to pool funds into a diversified portfolio of loans, mitigating individual loan risks.
Definition: A feature on lending platforms that allows investors to buy or sell loan shares or Notes to other investors before the loan matures. This provides liquidity by enabling investors to exit investments early. Use: The secondary market is often used by investors who want to liquidate their holdings or capitalize on better investment opportunities.
Definition: A tool that automates the investment process by selecting loans according to predefined criteria, such as interest rates, loan duration, or risk scores. Auto Invest continuously reinvests available funds to ensure optimal use of capital. Use: This feature helps investors who want a hands-off approach to investing, ensuring their money is continuously working without manual intervention.
Definition: The original sum of money invested in a loan or the amount the borrower owes without including interest or fees. In loans, the principal is the base amount on which interest is calculated. Use: Investors are repaid both the principal and interest over the loan term, with the principal being the core capital they initially invested.
Definition: The percentage charged to the borrower for the use of the lender's money, which is paid periodically over the loan term. It represents the return on investment for the lender. Use: Higher interest rates generally indicate higher risk, but they also offer higher returns for investors.
Definition: A ratio that compares the loan amount to the value of the collateral securing the loan. For example, a 50% LTV means the loan is half the value of the collateral. Use: A lower LTV ratio suggests less risk because the loan is well-secured by the collateral, providing a safety buffer for investors.
Definition: A loan where the interest is paid periodically, but the full principal is repaid only at the end of the loan term. This structure delays the repayment of the principal until the loan’s maturity. Use: Bullet loans are commonly used in real estate or project finance, where the borrower may not have the means to repay the principal until the asset is sold or the project is completed.
Definition: A loan that is repaid in fixed, regular payments over time, typically including both principal and interest. Installment loans spread the repayment over months or years. Use: Investors benefit from a steady stream of income, and the risk is reduced as the borrower is continually reducing the principal owed.
Definition: A type of financing where businesses borrow money against the amounts due from their customers' invoices. It allows businesses to unlock cash tied up in unpaid invoices. Use: Invoice financing is popular with small businesses that need immediate cash flow to continue operations while waiting for customers to pay their invoices.
Definition: A short-term, high-interest loan typically used to cover expenses until the borrower’s next paycheck. These loans are usually unsecured and have high default risks. Use: Payday loans offer investors high returns due to the elevated risk, but they also carry a higher likelihood of borrower default.
Definition: A loan provided to fund the construction or development of a project, typically in real estate. Repayment is usually structured around the completion and sale of the developed property. Use: These loans often have a high LTV and are secured by the value of the property being developed, offering some protection to investors if the project is successfully completed.
Definition: A risk management strategy that involves spreading investments across various loans, industries, or regions to reduce exposure to any single asset or borrower. Use: By diversifying, investors lower the risk of loss if any single borrower defaults, as gains from other loans may offset losses.
Definition: A collection of loans held by a loan originator or invested in by a lender. It includes various types of loans, which could range in risk, return, and term. Use: Investors often analyze the performance of a loan portfolio to assess risks, especially focusing on default rates and the overall health of the loan originator’s portfolio.
Definition: A loan that is in default or is close to default, typically defined as being more than 90 days past due on payments. Non-performing loans pose a higher risk of loss for investors. Use: The proportion of NPLs in a loan portfolio is an important metric for assessing the health of the loan originator and the risk level of the investment.
Definition: The percentage of loans in a portfolio that have defaulted, meaning the borrower has failed to make the required payments. This is a key indicator of the risk involved in a loan portfolio. Use: Investors use the default rate to assess the likelihood of losses, with higher default rates indicating higher risk.
Definition: An entity responsible for managing the loan on behalf of investors, including collecting payments, handling communications with borrowers, and managing defaults or restructuring when necessary. Use: Loan servicers play a crucial role in ensuring that payments are collected and distributed to investors efficiently.
Definition: The total expected return on a loan or investment if it is held until maturity. YTM takes into account the interest payments, the time remaining, and any potential discounts or premiums. Use: Investors use YTM to estimate the overall profitability of a loan when they intend to hold it to the end of its term.
Definition: A financial measure that calculates the internal rate of return for a series of cash flows occurring at irregular intervals, commonly used in P2P lending to evaluate performance. Use: XIRR allows investors to better understand the real rate of return on their investments, accounting for the variability of cash flows.
Definition: A numerical rating used to evaluate a borrower's creditworthiness based on their past borrowing behavior. Higher scores indicate lower risk. Use: Credit scores are critical for determining the interest rate charged on loans and the likelihood of borrower default.
Definition: The process of negotiating new terms on an existing loan to make it more manageable for the borrower, typically by extending the term, lowering the interest rate, or reducing payments. Use: Debt restructuring can help prevent defaults and ensure that borrowers are able to meet their obligations, benefiting both lenders and borrowers.
Definition: The process of collecting payments from a borrower after they have defaulted on a loan. This could involve legal action, repossessing collateral, or selling off the debt to third-party collectors. Use: Loan recovery efforts are important for minimizing investor losses when a borrower defaults.
Definition: The risk of losing the original investment, particularly if the borrower defaults or the value of the underlying asset (collateral) falls. Use: Investors need to assess capital risk, especially in unsecured loans or high-risk lending situations, where there may be little to no recourse in the event of a default.
Definition: The risk that an investor will be unable to quickly sell an asset or loan to convert it into cash without significantly affecting its price. In P2P lending, this is especially relevant when loans are difficult to sell on the secondary market. Use: Investors may face liquidity issues if they cannot exit an investment when needed, particularly if the platform's secondary market is inactive or loans are difficult to sell.
Definition: An asset pledged by the borrower to secure a loan. If the borrower defaults, the lender has the right to seize the collateral and sell it to recover the loaned funds. Use: Collateral provides a safety net for investors, reducing the risk of losing their principal in case of borrower default.
Definition: An investment strategy that allows investors to manually select loans based on criteria such as interest rates, loan terms, and risk levels. This provides more control than auto-invest options. Use: Investors create custom strategies to fine-tune their portfolios and optimize returns based on their personal risk tolerance and financial goals.
Definition: An investment strategy focused on loans with shorter repayment periods, often less than one year. Short-term strategies are typically used by investors looking for quick returns or high liquidity. Use: This strategy allows investors to recycle their funds more quickly by focusing on loans that mature faster.
Definition: An investment strategy that focuses on loans with longer repayment terms, sometimes lasting several years. This approach can offer higher returns over time but comes with increased exposure to risk. Use: Investors adopting a long-term strategy are typically more interested in stable, long-term returns rather than short-term liquidity.
Definition: A situation where cash sits uninvested in an investor’s account due to a lack of suitable investment opportunities or inefficiencies in the platform's auto-invest system. This reduces the overall return on investment. Use: Platforms that suffer from cash drag negatively impact investors’ returns since uninvested cash earns no interest.
Definition: Occurs when a borrower fails to meet the obligations of a loan agreement, such as missing scheduled payments. Defaults can lead to losses for investors, depending on whether the loan is secured or covered by a buyback guarantee. Use: The frequency of defaults in a portfolio is a critical measure of risk, with higher default rates leading to greater potential losses.
Definition: An additional charge imposed on borrowers who miss the due date for loan payments. This fee can compensate investors for the delay in receiving payments. Use: Late payment fees are a common penalty in lending agreements and help incentivize timely repayment from borrowers.
Definition: The time frame after a payment due date during which the borrower can make a late payment without incurring penalties or facing loan default. It gives borrowers flexibility to manage temporary financial difficulties. Use: A grace period provides some breathing room for borrowers, but investors may face delays in receiving their returns during this time.
Definition: A situation where the value of the collateral exceeds the loan amount. It provides additional security to investors, as the collateral can fully cover the loan and still leave a buffer in case of default. Use: Overcollateralized loans are seen as lower-risk investments because the excess collateral increases the likelihood of recovering the full investment.
Definition: The process of automatically reinvesting interest payments back into new loans or financial products. This can increase returns through compounding, where earnings generate additional earnings over time. Use: Interest reinvestment allows investors to maximize their returns by keeping funds actively invested rather than sitting idle in their accounts.
Definition: Modifying the terms of an existing loan, such as extending the repayment period or reducing the interest rate, to help a borrower manage repayments. It is often done to prevent a loan from becoming non-performing. Use: Loan restructuring helps avoid defaults by making the repayment terms more manageable for the borrower, reducing the likelihood of losses for investors.
Definition: The potential for loss due to fluctuations in the exchange rates of currencies. Investors who lend in foreign currencies are exposed to this risk, as changes in the exchange rate can reduce the value of their returns. Use: To mitigate currency risk, investors may choose loans in their home currency or use hedging strategies to protect against unfavorable exchange rate movements.
Definition: A pricing strategy where the interest rate of a loan is determined based on the borrower's risk profile. Higher-risk borrowers are charged higher interest rates to compensate for the increased risk of default. Use: Risk-based pricing helps ensure that lenders are adequately compensated for taking on risk, while lower-risk borrowers can benefit from reduced rates.
44. Loan Term
Definition: The length of time a borrower has to repay a loan. Loan terms can vary widely, from a few months to several years, depending on the type of loan and the platform's offerings. Use: Investors often choose loan terms based on their investment strategy, balancing liquidity needs with the desire for higher returns(
Definition: A measure of the profitability of an investment, calculated as the percentage of profit earned on the principal amount invested. ROI is a key metric used to assess the performance of loans or portfolios. Use: Investors rely on ROI to compare different investments and determine which ones offer the best returns relative to the risk(
Definition: Stands for "Single Euro Payments Area," a payment system that simplifies cross-border euro transfers between European Union member states, making them as fast and affordable as domestic transfers. Use: Platforms often prefer SEPA transfers for efficient and low-cost movement of funds between investors and loan originators within Europe(
Definition: A financial reserve set aside by a loan originator to cover potential losses from defaulted or non-performing loans. This is a safety net that reflects expected future losses in a loan portfolio. Use: Loan originators with higher provisions may be preparing for future defaults, signaling caution. It helps investors assess the risk associated with a portfolio.
Definition: A method used to classify loan receivables based on the time they’ve been outstanding. This analysis helps in understanding how many loans are overdue and for how long. Use: Investors use aging analysis to identify trends in delayed payments and assess the risk of loans becoming non-performing. Loans aged more than 90 days are typically classified as non-performing.
Definition: A method of evaluating the performance of a specific group of loans (originated within the same time period) over time. This analysis tracks the default rates, repayments, and other performance metrics for loans of the same "vintage." Use: Vintage analysis helps investors understand how the loan originator’s underwriting standards are performing across different periods and economic conditions.
Definition: A deeper level of vintage analysis that focuses on how loans within a specific vintage are aging over time, highlighting trends in loan performance and defaults. Use: This helps investors see how loans from the same origination period are progressing in terms of repayments and delinquencies, providing insights into potential future performance(
Definition: The percentage of loans that have been written off as uncollectible relative to the total loan portfolio. A high loan loss ratio suggests poor loan performance and higher risk. Use: Investors evaluate this ratio to determine the quality of the loan originator’s portfolio. Lower ratios indicate better risk management.
Definition: The proportion of a loan portfolio that has been officially declared as uncollectible. It represents the final stage after defaults when attempts at recovery have failed. Use: The write-off rate indicates how much of a loan originator's portfolio is considered a total loss and can’t be recovered, which is a key indicator of portfolio health.
Definition: The difference between the interest income generated by loans and the interest expenses associated with funding those loans, expressed as a percentage of total assets. Use: A key measure of profitability for a loan originator, the NIM helps investors understand how efficiently the company is managing its lending operations(
Definition: A measure of the loan originator’s ability to cover non-performing loans with its provisions for loan losses. A higher ratio suggests stronger financial health. Use: Investors use the coverage ratio to evaluate how well-protected the loan originator is against potential losses, with higher ratios signaling lower risk(
Definition: The ratio that compares a company’s total liabilities to its shareholder equity. In the context of a loan originator, it measures how much debt the company is using to finance its assets. Use: Investors look at the debt-to-equity ratio to assess the financial leverage of a loan
56. Loan Impairment
Definition: A reduction in the recoverable amount of a loan due to a deterioration in the borrower’s creditworthiness or financial condition. Impaired loans may eventually become non-performing loans if not resolved. Use: Loan impairment signals a potential risk of default, and investors track impairment levels to evaluate the ongoing health of a loan portfolio.
