Loans having buyback has caused interesting moves on the P2P market. Many investors flocked to the idea of having more guarantees, with rather solid returns – it was possible to earn 13-15% annualized with buyback guaranteed loans. However, the interest rates of loans have come down and I’ve witnessed several discussions on how the lower interest rates are not good enough anymore.
Twino announced that they are reducing interest across the board to 10% per annum to align better with the corporate interests. Mintos interest rates have also been slowly coming down on many of the buyback guaranteed loans and is starting to average closer and closer to 10%. So, is a 10% return too low?
Comparing returns & risk to other investments
If you look at the current state of what’s happening on the markets, then 10% in comparison to that is a rather reasonable number. Stock markets are not doing particularly great, and short term reaching such returns without taking significant risk is rather impossible. Looking at real estate, you can get returns that are higher, but that includes quite a lot of work on your part. If you look at passive investments, then I’d say that the 10% number when looking at the effort you have to put into the investment is rather reasonable.
Another issue, however, is the risks involved with investing. I heard more than one person say that with the lower rate the risk is no longer worth it. I’d actually be super interested to read any kind of actual risk analysis on this, because one thing that people seem to not keep in mind is that by reducing the interest rate the companies that offer it actually lessen the financial strain they place on themselves, making it less likely that they will fold in the future. So to some extent bringing the interests down actually also reduces the risk levels.
The third thing to keep in mind is the issue of supply and demand. Paying higher interest rates than strictly necessary is just bad business. It’s unlikely that any of the companies that have reduced the interest rates haven’t done serious analysis into the amount of money available on the market. In many countries people/investors are sitting on unprecedented amounts of money, meaning that there isn’t an issue of having enough supply. With other investments not offering similar returns with similar effort, enough people will gravitate towards P2P loans.
Will the rates drop further?
Seeing how some loans on the market in Mintos for example are already below 10% (and I know so are some Viventor loans), I’d actually dare say that there is still room for buyback rates to drop, because enough investors will appreciate the lack of default risk that they would have to carry otherwise. I don’t see the rates dropping much further, but clearly there is still enough money to go around.
Another thing that might influence the rates is also the inclusion of new investors. As buyback guaranteed loans get more and more attention more investors could enter the market driving the rates down even further. Those who remember what the market was like when Bondora bids worked by investors underbidding one another can easily imagine that driving rates to the ground is a rather viable option for those who earn returns more from the volume of their investments than the return rate.