Is a 10% return too low?

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

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.

 

5 thoughts on “Is a 10% return too low?

  1. Hi, Great post as usual but the problem is that buyback is only as strong as the company offering it. For Twino, it’s finabay
    and the problem for me is that they are issuing bonds at 15%
    so if you are loaning them at 10% like it’s now, you are basically getting screwed 5 percentage point
    http://cbonds.com/emissions/issue/184811

    1. It’s the same with other companies as well, most bonds are priced at ~12% from what I’ve read. The issue being however, that most retail investors cannot access the bond market (general minimum is 50 000€ to participate).
      I think this might go in different ways in the future – if people can finance more loans, companies will actually be able to release less bonds or lower the rates. Alternatively if the retail investors’ money dries up then they might increase the rates, but lack of money doesn’t seem to be an issue.
      I do agree though, it would be nice of them to pay out the same rates they do for bonds.

      1. Good post and an even better comment Kristi, except for the very last sentence – paying the same rate to P2P investors as for bonds when they could get away with paying less would just be – as you correctly pointed out in the original post – bad business.
        Finabay is essentially a payday lender, they’re not in the “being nice” business, they’re in the making money business.

        1. Indeed, it would be nice but I wouldn’t hold my breath for it ever happening 😉 Currently it’s interesting though to see how much less they can get away with.

  2. To be honest, I think 10 % where Mintos is now is the bottom more or less with me.
    Taking account the risk of the platform a lot below 10 % is not viable. However, I agree the interest rate should be closer to 10 % than 20 % when there is less risk than lending without any guarantees/collaterals.
    Much below 10 % is not worth the hassle. From banks you can get 1-2 % for long maturity deposits (Bigbank, Nordax, Norwegian Bank etc) and they have a governement backing up to a certain amount of money + they have super little hassle. Therefore a little more hassle with a vague buy back guarantee deserves a bit higher rate IMO.

    When it comes to real estate investing and the amount of hassle, it can be quite little at its best. If you manage to get a tenant who lives 10 + years and you only get to know (s)he is living there when you see the bank deposit from him/her in the beginning of the month. On the other hand, if you are doing airbnb, you need to work quite hard (organizing cleaning, key pickups, laundry etc).

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