Peer-to-peer loan marketplaces like Mintos, Peerberry, Esketit, and so on, are platforms where investors can invest, starting from 10 euros, in loans issued by microfinance companies worldwide.
Such Peer-to-peer loan marketplaces offer high returns of around 10% and loans with various maturities and high levels of automation, making it easy to manage your portfolio.
Peer-to-peer loan marketplaces have many positive aspects but there are many risks well; thus, you need to evaluate risk carefully before investing.
Let’s review key things you need to know before investing on Peer-to-peer loan marketplaces.
Understand risk when investing on Peer-to-peer loan marketplaces
Almost all of them offer a buyback guarantee which is a microfinance company's obligation to buy the loan back from you if the borrower fails to pay the loan back for a defined period of time, usually 60 days.
Thus if a buyback guarantee is provided your main risk is that the microfinance company (also called loan originator) will fail to pay under buyback when many loans become overdue.
To evaluate this risk you need to evaluate the loan originator's financial performance and portfolio quality and other nonfinancial risks like compliance, operational (fraud), reputation, etc.
Therefore before investing on peer-to-peer loan marketplaces evaluate the loan originator!
Choose a reliable peer-to-peer loan marketplace platform to invest
The majority of peer-to-peer loan marketplaces are operating outside the regulation and unfortunately many “not good people” took advantage of this situation and the market witnessed several fraud cases when investors money disappeared.
Therefore to mitigate this risk you could choose licensed platforms like Nectaro, Mintos, Twino, etc.. License is not a hundred percent guarantee but it reduces risk significantly and platforms licensed in Latvia are subject to a compensation scheme of up to 20,000 EUR.
Other things that might be a sign of platform transparency are (1) a Payment institution used for storing investor funds, if it is a reputable Bank or payment service provider it is a good sign (2) a Team with a solid track record is an indicator of trustworthiness since good specialist, especially from compliance team and finance would unlikely join shady company (3) past reputation of the platform, investors often do they job very well evaluating the platform and share this information with other, thus explore chats and read what people think and please if you already using some platforms leave review - peer-to-peer loan marketplace platforms.
Build your portfolio wisely and based on your risk appetite
Almost all platforms offer so-called auto invest that allow investors to set up investment rules and then the system will automatically invest and reinvest your money, usually, they have a lot of parameters thus do not be shy to use as much as you need.
Diversify. Most people have lost or their money is stuck due to the war in Ukraine, due to loan originators from Ukraine and Russia not transferring funds, experiencing financial difficulties, etc. Many people experience losses due to revoked licenses of microfinance companies and as mentioned before fraudulent activities. Therefore diversify your money by countries, loan originators, and even platforms. With auto investment, it can be done easily.
Understand risk and reward. In many cases offered returns are not driven by risk but more by the loan originator's need for money thus on the same platform you can find loans with lower risks but much higher returns and vice versa. Therefore remember, that longer maturity should be rewarded with higher returns, unsecured loans should have higher interests, and higher-risk loan originators should offer higher returns.
Auto-invest allows you to build and maintain a short-term portfolio easily thus it is a good idea to keep a share of your investments in the short-term loans to make your portfolio more liquid and exit fast in case of need.
Monitor situation constantly - portfolio performance, microfinance company standing, and market
Monitor your portfolio constantly. Most microfinance companies offer buyback guarantees thus in case of borrowers delay you will be paid by the microfinance company therefore it might seem that the proportion of overdue loans in your portfolio does not matter, but it is not true. An increasing level of overdue loans might indicate that microfinance companies do a bad job and if overdue loans reach the critical level they might fail to pay under buyback.
Monitor Loan originator performance.
If buyback is provided your analysis should focus on microfinance company performance and its ability to pay under buyback. To do so you need to regularly monitor the loan portfolio performance of the microfinance company, and its financial standing including profitability, provisions, and liquidity, and if you notice red flags you should adjust your portfolio accordingly.
Monitor market performance. There might be conditions and events that might significantly impact microfinance performance, like economic conditions in the country (to be mentioned that often worsening economy affects microfinance company customers first), legislative changes that might impact microfinance company performance, like rate caps etc., and adjunct auto invest accordingly.
Always do your own analysis
Peer-to-peer loan marketplaces offer awesome investment tools but the risk of losing money is medium-high therefore always do your own research and monitor the situation on a regular basis, it is your money you should not lose it!
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We wish you a good day and successful investing!
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