Buyback for P2P loans, how does it work?

When choosing a P2P platform to invest into, buyback has become a significant vote in favour of some sites. Others, however, are a bit suspicious and wonder how guaranteed return makes economic sense. This is a topic that I get a fair bit of questions about, and I was in the camp of those wondering where the catch was at start as well. However, this is the reason you do background checks – to figure out how the economic model of certain sites works and whether or not it makes sense.

Different options of buyback

Currently I invest on three different P2P sites that offer a buyback option. The Latvian sites Twino and Mintos offer a buyback campaign that purchases back delinquent loans. For Mintos the deadline is 60 days, for Twino the deadline is 30 days delinquent. (This seems to be a bit earlier at times, since I’ve been seen buybacks from both sites already.) The Estonian site Omaraha also offers a kind of a buyback – for them it’s a principal buyback in the value of ~60% of the remaining principal. Both Twino and Mintos however also pay out the interest you have earned. So, in theory for both of those sites it’s as near to guaranteed return as it can get in P2P, how does it make financial sense?

How do the numbers work?

The biggest question that you should be asking when it comes to buyback is this – how does the business still make a profit? This is the key issue – they have to be making profit off the loans otherwise the buyback would not be sustainable in case of an economic downturn. This means that despite the fact that some of the profits earned off loans are paid out to investors, the business still earns some.buyback For both the Latvian sites the % you earn is in the ranges of 12-15% return on a yearly basis. This means that clearly the actual loan rate for the people taking out the loans has to be significantly higher to justify such a payout model. For Twino the loans are payday loans, meaning the interest rates are likely to reach up to 100%, for Mintos some of the loans are for example car loans, that are likely to go up to 30% per year. In addition to the overhead interest any and all penalties, extra interest and fees are also placed on top of the interest that you earn as an investor. This means that buyback is viable only for loans that have a high enough margin for the loan originators to cover (un)expected losses and wait for recovery to happen on defaulted loans. For Omaraha the interest rates on certain groups aren’t too high, which explains the buyback being partial – allowing a return of only a part of the principal. Bondora for example is against buyback on principal, but theoretically it could be implemented with good data workings provided they were interested in doing even more of the recovery (which they are not at this point in seems). Another important note here is the length of the loan – for Twino getting investors involved would be near impossible without buyback due to the short term of the loans, since waiting for recovery would be disproportionately long compared to the loan terms on the site.

Risks associated with buyback

In the world of consumer credit it’s common for companies to finance themselves using investors’ money. This is how most SMS-loan type businesses work – they release bonds at about 10-12% rates that finance their loan origination. Compared to the buyback process (and financing loans through the marketplace with investors’ money) releasing bonds is actually rather expensive – take into account all the fees for lawyers, documentation etc. Plus, financing the loans through a marketplace allows the businesses only use as much of the supply as they need, meaning they don’t pay out interest on money that’s still not used, actually probably making offering the buyback cheaper than other methods of financing their loan portfolio.

However, this does not eliminate risks completely. Firstly, in case of the loan originator going under you’re still in trouble. Secondly, even with the best laid plans, issues might happen – for example in case of a crisis buyback may be (temporarily) cancelled. Thirdly, this is an untested way of financing – issues may occur that none of us have been able to predict.

This means that you should still firstly diversify between different loan originators, still diversify between loans themselves and diversify across different investments and take a critical look at the background of the originators to see if their financial models work out. However, this might just be something that will take more ground in the world of P2P – reducing risks is one thing that might motivate more risk averse investors to try out P2P investments.

16 thoughts on “Buyback for P2P loans, how does it work?

  1. Hi Kristi, great post! It’s good to see that at least some bloggers take time to look at the buyback model from both sides (i.e., also the Loan Originator perspective is considered).

    Before I go on, full disclosure: I work for mogo Estonia.

    I have one comment – the buybacks done on the Mintos platform do not always happen due to failure to pay by the borrower. In many cases the Borrower has asked to change the terms of the loan (e.g. principal increase, change in loan term, loan paid back before it reaches maturity etc.). If this happens we buy back the loan.
    This explains why you’ve seen loans bought back before they’ve been late for 60 days.

    Consequently, the people who assume that buyback = default arrive to distorted conclusions about the general payment discipline of our clients.

    We’re working with Mintos to provide better data about this in the future, but for the time being I suggest looking at the “Payment Schedule” of a specific loan – if the Borrower has no late payments when the loan is bought back then most likely the loan was repaid early or there was a change in contract terms (e.g. principal increase).

    1. Hey! The rescheduling bit is a good point, I think I’ve heard that mentioned somewhere, but it’s not clearly written out anywhere I think, which is why I missed it for this post. Is there any statistics about how many of the loans that get bought back are rescheduled? It is a rather big difference if it’s 50-50 or 20-80.

      1. Unfortunately there currently is no way to distinguish between buyback on the platform at this point.
        I can assure you though that significantly less than 50% of clients default 😉

  2. nice article, just wanted to add that another p2p offering buyback is viventor (100% of investment is returned) and fellow finance (70% of investment is returned)

    1. Yes, indeed, buyback is rather popular. Do you personally invest with Fellow Finance? What is your experience with them? (Is the buyback timed at 60+ or something else?)

      1. I only have Viventor account. They offer 7pa, low LTV, secured loans by realestate mortages, 60 days buyback (without interest). Today they are adding new type of loans (short term – 1 month, 15pa – but riskier).

  3. Great article. I would be interested to know your allocation between Mintos and Omaha and Twino.

    Another thing to consider is if one P2p provider fails many will try to pull out their money or stop lending, this could mean that other p2p lenders will have their finance dry up cutting their finance, which could create a daisy wheel effect of p2p collapse. While this scenario is remote, it is not impossible if it was about to happen to the banks in 2008 it could happen to the p2p companies.

    There should be more transparency in declaring the sustainability of this scheme, especially if a recession hits and many loans default because of unemployment etc.

    Another aspects is how many profits from the previous years is being retained by these companies to honor such a scheme. If the shareholders take frequent dividends it would be impossible to sustain such a scheme, this info is not available and make the system very opaque. I do hope regulators step in and create a structure to disclose such information.

    Please see my collection of educational resources about money http://happylater.com/financial-independence-frugality/ and p2p http://happylater.com/p2p-comment-blogs/

    1. That’s a good point – in case of tumultuous economic times, people might behave irrationally. For P2P, though, I think the risk is the institutional investors dropping out, since they provide the bulk of the volume for most big sites at least.
      My current allocation between the three is something like 65% Omaraha, 25% Twino, 10% Mintos. Importance of Omaraha will likely be reduced in the future since they won’t really offer the same volume as the Latvians do.

  4. Thanks for your reply. There really should be a rule on dividends to shareholders as they will reap the benefits in good times but not the responsibility in bad times. I suppose only after the investors loose a bunch of money that the regulators will wake up to this loop hole.

  5. Very disappointed with Twino now. Interest rate has been reduced to 10%. explanation provided by them does not make much sense

    1. I’m honestly not surprised. They were overpaying (15% annualized was a lot to have with buyback). Mintos interests are coming down as well, I believe 10% will be the new equilibrium level soon for buyback loans.

  6. Is buying loans in the 31-60 day range with buyback guarantee a viable option? Since mintos pays the delinquent interest you are getting two interest payments and get to find another loan quickly.

    1. I haven’t used the secondary market of Mintos to test this. For Twino if you sell a delinquent loan, then you receive the interest owed to you upon the sale happening. I am unsure for Mintos – I would guess not that many people would be selling delinquent loans since they are sure of the buyback.

  7. Hi, Twino doesnt provide ratings of the loans that are covered by the buyback, isnt that strange? Now it is impossible to assess the underlying risk without buyback guarantee. Any thoughts?

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