With a range of platforms offering investment opportunities in the world of P2P loans, investors can take advantage of excellent short, medium and long-term ROIs, which far exceed those available in high street banks. Many of these services use automated investment tools to manage portfolios. To help you understand how these services work and assist you in deciding whether P2P and automated services are worth investigating, InvestItIn caught up with current market leader Mintos to discuss AI, investment risks and the P2P lending.
Some investors might be fearful of using an automated function to manage their investments. What would you say to allay these fears?
At Mintos, we pride ourselves on the high-quality of loans on our marketplace and take as many precautions as possible to make sure the loan originators joining our platform are reliable in originating and servicing quality loans. This can be seen in the several layers of risk mitigation for investors we have in place. We only partner with loan originators that have developed consistent scoring models for borrower evaluation when issuing loans, and when possible, use data validation with third-party data sources. When it comes to mortgage and car loans, borrowers provide collateral which lowers the risks for our investors. For business loans, other credit enhancements are obtained, such as a personal guarantee. When we are evaluating loan originators, we focus on the quality of their loan book. In addition, we look not only at the formal policies but also at their implementation, making sure that it lives up to our rigorous standards.
You can read more here.
What proportion of your investors favor Auto Invest over manually choosing which loans to invest in?
Auto Invest is very popular on Mintos, in fact, 76% of our investors use it to streamline their investment experience.
Mintos recently added its first UK loan originator.
Are there plans for further expansions?
We currently have 44 loan originators from 23 countries on five continents around the world. We are currently planning to expand our presence in Latin America and further develop the regions we are already active in, including the UK.
Reports suggest that people in their twenties and thirties are choosing to save rather than invest. What does Mintos do to attract younger investors?
The majority of our investors are actually in their twenties and thirties. This is because younger investors value the flexibility and multiple opportunities that traditional investments such as stocks and bonds can’t offer them.
For example, we offer them access to higher returns than traditional investments, while also providing them with several layers of risk mitigation to protect their returns. This includes the buyback guarantee by loan originators and numerous opportunities for diversification to balance their risk versus return.
In addition, at Mintos, we also value transparency and we are always open about market statistics, which are available on our website in real-time. We also allow our investors to see the annual percentage rate of loans at which loans are issued to borrowers and provide information on the borrowers of the loan.
Does Mintos protect investors against loan defaults?
There is a large variety of loan originators on the Mintos marketplace. The loan portfolio of each originator is carefully assessed by our risk team prior to joining the marketplace. After the launch of the partnership, we continue monitoring the loan portfolio and the loan originator for risks on an ongoing basis.
On an individual loan level, loan originators issue loans in accordance with their own established underwriting and credit scoring policies. These include not only the industry standard processes, but also a series of advanced checks – identity, credit, affordability, and fraud – to ensure borrowers are creditworthy. The exact underwriting policy undertaken by each company may differ, but the main principles are the same.
All loan originators that place loans on the Mintos marketplace are required to keep a certain percentage of each loan on their balance sheet. This is called skin in the game and ensures the loan originators interests are aligned with our borrowers, as they have a stake in the loan too.
In addition, to protect investors from borrower defaults, many loan originators on the Mintos marketplace offer a buyback guarantee. The buyback guarantee means that if the loan is delayed by more than 60 days, the loan originator will repurchase the investment for the nominal value of the principal and the accrued interest till the date of repurchase. This happens automatically and with no additional efforts required from the investors’ side.
By offering a buyback guarantee, the loan originator keeps the borrower’s default risk on its side. To compensate for this risk, the loan originator takes a higher share of the interest paid by the borrower. In other words, the loan originator manages the buyback guarantee from the interest rate spread between the interest rate they charge to borrowers and the interest rate they pass to investors.
The numerous diversification opportunities on Mintos is another way investors can protect themselves from risk and minimize the impact of loan defaults. Diversification is the most important component of reaching long-term financial goals while minimizing risk. On Mintos, investors can diversify their portfolio with ease. Our marketplace offers opportunities to diversify by investing in fractions of loans across different borrowers, originators, loan types, and geographies – starting from EUR 10 per investment. Even more, if investors input their desired diversification parameters into our Auto Invest tool, it happens automatically.
All of these factors together go a long way to protect investors and make the marketplace a great place for easy, transparent, and diversified investment experience. As with all forms of investment, when investing in loans through the Mintos marketplace, your capital is at risk. But we do our best to make sure this risk is as low as possible.
Any tips on how to get the most from Mintos?
The best way is to utilize the numerous diversification opportunities on Mintos. The marketplace can offer you seven ways to diversify your investment portfolio. This includes diversifying across different type of loans, loan maturities, geographies, currencies, return rates, risk-levels and loans with and without the buyback guarantee and also across different loan originators.
We recently wrote a seven-part series which explores these opportunities in detail. We suggest to our investors to read through the diversification series, to make sure there are getting the most from Mintos and balancing their risk versus return.
You can read more on our blog here.
Mintos allows investors to invest in very short-term loans. Aren’t these particularly risky?
As with any investment, there are risks but as explained above we take great measures to have as many layers of risk mitigation in place as possible. According to Reuters, the average payday-loan default rate is around 6% and, surprisingly, defaults in the United States were at their highest before the financial crisis – not after. This means out of every 100 loans, six of them are expected to default. This is much lower than most people think. Of course, the default rates can vary depending on the country and borrower class.
In total, default levels vary from 2-25% for payday loans. The lower default rates are reached by well-established companies with long track records and strong and efficient client assessment techniques. The client segment the company is targeting has a large impact on its default rate (prime, near prime, subprime). The riskier the borrower class, the higher the default rate. Higher default levels can be explained by inherent characteristics of the population of each country, more specifically, borrower payment discipline. Based on our observations, some of the countries with high default rates for payday loans are Denmark, Kazakhstan and Spain, on the other hand, countries like Sweden have typically low default rates.
We recently posted an article giving an in-depth explanation about short-term loans which explains the risks and measures behind this loan type, which you can read here.
What does the future hold for Mintos?
We see ourselves becoming a truly established and global marketplace for loans that facilitate the free movement of capital. To achieve this, we will continue to expand across the world and add more investment products to our marketplace for our investors to invest in.
With thanks to Celeste Skinner
