A large variety of loans kinds to choose from
Buyback or not ? The most critical aspect of your investor's profile
That’s the first consideration, and probably the most important one. A buyback[?] mechanism means that if the borrower fails to reimburse in a timely fashion, the originator[?] will purchase back the delinquent loan. The delays is usually 30 days, sometimes 60. Without such a guarantee, you may lose the whole remaining loan’s capital if the borrower defaults !
In addition to this standard buyback mechanism, there are two variations :
- “Payment guarantee”, which guarantees the payment of interests on time. It’s a rare feature and only marginally influences the returns.
- Partial buyback, reimbursing only a given percent of the outstanding capital.
Of course, loans covered by a buyback guarantee are those considered as safest, and thus they offer a lower interest rate.
Buyback guarantee is only available for individual loans; it usually doesn’t cover real-estate crow-lending and business loans. The term “unsecured loan” is often used in this case, as opposed to “secured loan” for those covered by the buyback guarantee.
Types of loans offered by P2P lending platforms
There are basically three kinds of loans available : individual loans, business loans and real-estate loans. Deciding in which loan category to invest is the third component of your investor’s profile; like the two previous criteria, it will influence the risk level (and thus the returns) of your crowd-lending portfolio.
Individual loans and small business loans
Should you choose to invest in individual loans without a buyback guarantee, you may have to dig a bit further. Individual loans may be sub-divided into payday loans, car loans, home improvement loans… The loan kind will mostly influence its amount, which will condition its duration, which will in turn affect the interest rate. Also, loans used to buy a car or a house may provide a better safety, at the cost of a lower interest rate : the bought item is used as a collateral, and may be resold if the borrower defaults.
Professional loans for small amounts will often be available on the same platforms as individual loans. They may be more risky, though, so the buyback guarantee seldom applies to them.
Invoice finance is a specific business model dealing with professional loans. In this case, the loan is used to provide advance payment of an invoice which will be paid later (usually 1-2 months later). There are platforms dedicated to invoice finance, but these loans can also be found on generic platforms.
Large business loans
Loans requiring large amounts of capital will be found on dedicated platforms. They will commonly be used by businesses requiring to fund business expansion. These loans can be highly speculative, yielding great returns – with a matching risk level, of course –
Real estate crowdfunding
Large amounts of money are usually involved, and the returns may be more uncertain, as is any real estate-related investment. Moreover, many these investments may not pay interests monthly, but rather once the project is completed. That’s another point to keep in mind if you’re looking for a regular income source.
Here are the icons we’ll use to depict the different loans kinds :
This icon will signal individual loans
The factory icon will be applied to business loans