P2P lending has rapidly emerged as an alternative to traditional bank financing. While bearing the borrower’s bankruptcy risk, many investors behave as wishful thinkers, who focus only on getting high returns but ignore their investment risk. Buyback guarantee has a role on this perceived risk-free investment, let´s try to understand why.
What is a Buyback Guarantee
The answer varies as much as the P2P platform you want to invest in. Over the last few years, offering a buyback guarantee become a marketing tool to present P2P investments as safe. Any investor would rather see delayed loans bought back than defaulting on their payments. That created a strong incentive for P2P platforms to offer a buyback guarantee. However, better check some examples of how the buyback guarantee concept is applied and their implications in your investments.
No Buyback Guarantee Platforms
P2P lending platforms, such as Bondora, Fellow Finance, Flender, Monestro, Raize or Finbee follow a traditional approach where the investor alone bears all the risk of the loan. Because of this, the investor also typically receives a higher interest rate offer, which will hopefully cover the capital losses due to credit losses.
This traditional model without a buyback guarantee have developed into an hybrid, with examples such as NeoFinance, that offer investors the possibility to pay extra for a loan insurance. This fee goes to a provisional fund that will cover borrower’s liabilities in case of default. Even this approach is not risk-free, since it’s highly dependent on provisional fund management and proper loans risk assessment.
Buyback Guarantee by Loan Originator
In most of the cases in which a buyback guarantee is offered, such guarantee is provided by the Loan originators and not by the P2P platforms themselves. This means that the loan originator will repurchase your claim against a borrower after a particular number of days over the loan maturity date. In this particular case you need to know the Loan Originator financial status and capacity to fulfill such promise. Make sure you know about other liabilities they have in case of insolvency.
You can find these type of buyback guarantee from some of the Loan Originators present on Mintos, Viventor, Bondster, Debitum Network, IUVO Group or Lenndy, among others. Remember that on this case, P2P lending platforms are not reliable for the fulfillment of their buyback guarantees.
Group Guarantee by Financial Groups
More robust and well established P2P platforms, typically related with Loan Originators in a direct way, present a different type of Buyback Guarantee, based not in a particular Loan Originator, but on the financial group that owns the overall loan portfolio. This means that if the loan originator fails to repurchase your claim loan, the financial group that owns that particular loan originator will do it after a particular number of days over the loan maturity date.
Buyback Guarantee by P2P Platform
A number of recent P2P scams presented a business model that provided buyback guarantees on loans by the platform itself. Typically they merged multiple guarantees making it very difficult to understand who really was the guarantor. Check more on the post below.
No Buyback Guarantee but Assets
Among the reasons that make investors like so much to work with P2P platforms focused in real estate is the offer of a physical collateral for your investment. No buyback guarantee, but the promise of a transparent and appropriate due diligence process on the assets available and a loan to value ratio capable of repaying investors their funds back, even in the worst case scenario.
Crowdestor developed a completely different model to address the lack of a buyback guarantee. In case you what to learn more about their approach, make sure to check the post presented below.
Typically, a Provision Fund does not give you a right to a payment so you may not receive a pay-out even if you suffer loss. The way a fund of this nature works is with absolute discretion as to the amount that may be paid, including making no payment at all. Therefore, investors should not rely on possible pay-outs from the Provision Fund when considering whether or how much to invest.
In the end of the day, as you can see from the analysis above, a buyback guarantee is not quite as simple as you might imagine. It does not make your investments risk-free, so you cannot take a buyback guarantee promise without making sure you did your own research and keep track of the evolution of the entities that provide you with such promise. The idea of a buyback guarantee is powerful, but make sure to question everything in order to improve your investment strategy and reduce the risks of your P2P investments to an acceptable level.
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