Default risk : what if the borrower doesn’t pay ?

The #1 risk when investing in loans

A borrower who doesn’t reimburse the loans is obviously the greatest risk when investing in P2P loans or through real-estate or business crowdfunding. In this article, we’ll examine the possible outcomes, based on real-life situations.

Loans covered by a buyback guarantee

Most P2P lending platforms offer loans covered by a buyback guarantee [?]. If the investor is late, the investor is reimbursed the principal and accrued interests after a given delay (30 or 60 days).

This delay varies from one platform to another; here are the buyback trigger delays and coverage for several platforms, as of August 2019.

The following platforms guarantee both capital and accrued interest :

PlatformBuyback delaySource
Mintos

60 days

Mintos FAQ

Grupeer

60 days

Grupeer FAQ

Swaper

30 days

Swaper FAQ

Robocash

30 days

Robocash FAQ

Bondster

30 days or 60 days

Bondster FAQ

Viventor

60 days or 90 days

Robocash FAQ

PeerBerry

60 days

E-mail from PeerBerry’s support

Several platforms offer a more restrictive buyback guarantee which covers only the principal.

PlatformBuyback delaySource
Fast Invest

3 days

Fast Invest FAQ

Iuvo

30 or 60 days

Iuvo FAQ

Ekassa

60 days

Ekassa FAQ

Unfortunately, even if the loan is secured by a buyback guarantee, it’s possible for the investor to take a loss…

When buyback guarantee fails : Mintos’ Eurocent

I’ve repeatedly pointed out that the buyback guarantee isn’t an absolute guarantee. Indeed, the originator itself may end up in financial troubles, in which case it won’t be able to honor the buyback guarantee. This happened with one of Mintos originators called Eurocent. The consequences for the investors are still unclear, as is often the case when judiciary action is triggered. In July 2019, Mintos’ latest update mentioned that the court still didn’t approve the creditor list which was submitted one year earlier !

The best way to prevent large damages to your portfolio is to spread your portfolio between different originators. You may also want to investigate the originators themselves. For those who want to dig further on the topic of Mintos originators, there’s an excellent article at Explore P2P, comparing them in depth.

Last year, Mintos started rating their own originators, giving you an idea of how risky it is to invest with them. The auto-invest feature at Mintos also allows investors to automatically diversify their investments through selected available originators.

Partially secured loans : Omaraha’s warranty fund

Omaraha guarantees that if the borrower defaults, at least 60% of the remaining principal will be reimbursed to the investor. The exact percent depends on the current level of the warranty fund. As I’m updating this article, the amount available in the warranty fund has climbed to € 156,343; one year ago, it was only € 46,000.

This fund is paid for by borrowers, as Omaraha collects 3% from loan amount. This will work as long as there will be new borrowers, and if the default rate stays stable.

Overall I was compensated 70% of the total defaulted loans amount.

Happy ending : EstateGuru’s Toome avenue development

EstateGuru‘s loans aren’t covered by a buyback guarantee. In spite of the rigorous project selection, the borrower may fail to make a repayment. It happened for the project named Toome avenue development.

The borrower was supposed to repay the principal on November, 3rd 2017 but didn’t. One month later, on November 14th, 2017, EstateGuru started the process of selling the collateral. And one week later, on November 21st, 2017, the loan was repaid to investors, including interest, overdue charge and indemnity.

EstateGuru featured a short blog post on the collateral’s sale.

In summer 2019, EstateGuru announced two more successful recoveries : for Kiviloo Manor refinancing loan, the recovery was also extremely quick. On the other hand, for Kohila Mortgage Loan, it took nearly one year for investors to get back their capital as well as accrued interest. In another recent recovery, the lengthy process lead to very low returns : for the Tiiru refinancing loan project, the final return was only 4.47%.

Until now, in spite of several defaults on the platform, no EstateGuru investor has lost money. These happy endings are of course not guaranteed; however they show that a borrower’s default doesn’t always lead to a loss for investors, even if the loan didn’t come with a buyback guarantee.

Delays and uncertainty : CrowdEstate’s Kevade 9

In the case of this CrowdEstate project, the borrower didn’t even make its first interest payment (!) on March 20, 2017. Unfortunately for the investors, the enforcement proceedings seem to take forever.

While the project’s page features many updates, they may have left many investors frustrated; indeed, the proceedings are still ongoing, and currently the investors are kind of left in the dark regarding the future of their investment.

CrowdEstate's announcements regarding "Kevade 9" project
CrowdEstate's announcements regarding "Kevade 9" project

In September 2019, CrowdEstate announced a new tentative schedule for the repayment, which is supposed to happen at best on Q2 2020.

The long way to profits : Bondora’s recovery process

Month after month, I’m reporting decreasing returns from my Bondora portfolio. The main culprit is a high default rate, coupled with a low recovery rate. However, my earliest defaulted loans started to yield some money from the recovery process, as they finally moved to the bailiff stage. It overall took more than 6 months after the default occurred !

Diversity is king

In conclusion, I’ll stress once again the importance of diversifying your portfolio at every possible level :

  • Invest through several platforms
  • Spread your portfolio through many loans, using the smallest loan size allowed
  • Also spread your portfolio through several originators

2 thoughts on “Default risk : what if the borrower doesn’t pay ?”

  1. Hi, regarding Mintos, it is important to know that though the principal is covered, not all loan originators pay interest on delayed payments or similar, here’s a message from Mintos about that:
    “Some loan originators pay Interest income on delayed payments, some pay Penalty income. As well you need to take into account the grace period, each loan originator has defined its own grace period.
    Please find all information here – https://www.mintos.com/en/loan-originators/#details

    That is important since sometimes the amount of delayed payments can be significant, hindering the overall return rate.

    Reply

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