Twino BBG vs PG loans

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Twino has made an update in the loan product lineup they offer for investors, adding a new loan type “payment guarantee” to the previously existing “buyback guarantee” loan type. So what is the difference between the two?

As an investor…

For an investor payment guarantee allows for slightly more stable cash flow. Essentially when you used to invest into a loan, and it got delayed then the payment was made late when the BBG triggered. With the payment guarantee the idea is that the interest payments would always be made on time due to Twino taking a role in ensuring the payback. I’m honestly not sure how much of a difference it would be for most investors – the delay for BBG loans isn’t really that long most of the time.

However, this might be something that might encourage investors to lock their money into longer term loans since Twino is ensuring that regular interest payments happen. I’ve been allowing longer length loans into my portfolio for a while, and had no issues (a lot of them get bought back anyways, so there was no reason not to allow them in). Question now being though, which loans will be listed in the future with payback guarantee and which ones with buyback guarantee?

Another issue in addition to the potential loan lengths offered is the interest rates. It’s clear that the interest rates offered by Twino currently are a bit off, in the sense that there isn’t much difference between the short term (1 month) and the long term (24 month) loans. Payment guarantee is a potential tool that might allow them to differentiate between the two loan lengths, which is likely to result in the 1-month and other short term loan interest rates dropping (down to something like 7-8%).

As Twino…

The main benefit I see for Twino is twofold. Firstly, by encouraging investors to lock in their money into longer interest loans, it will allow them to manage incoming cashflow a lot better instead if having to rebalance it every month. I mean, as a CFO it must be much nicer to see steady predictions for the next 12-24 months instead of the next 1-3. Currently P2P investors are rather fickle, and switch between portals rather quickly.

Secondly, as mentioned, the potential interest rate drop. We’ve been seeing some testing on lowered interest rates in the previous weeks already, and clearly this trend is likely to continue. Since it’s obvious that there is enough of a supply of investors on the site (as evidenced by the fact that a lot of investors have cash piling up), then it’s reasonable for them to not overpay but to test what’s the sweet spot where they get enough financing, but don’t stop losing investors.

So the question is…

How long are the payment guarantee loans going to be? If they’re long term loans then it would make sense for them to keep their interest rate.

How high is the interest rate going to be? By providing investors with an extra layer of ‘security’, investors might be more relaxed about lower interest rates.

I haven’t managed to catch any payback guarantee loans on the market yet, but it’s definitely something to keep an eye on as they start appearing on the market since they might show an insight into future interest rates.

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.