When investing into P2P loans, sooner or later, you’ll stumble upon the word “Buyback Guarantee”. The Buyback Guarantee is offered on P2P platforms to give you additional security, but how does it actually work?
In this article, we’ll discuss what a Buyback Guarantee is and also what Extensions are, how they work in detail and what the benefit is to you as an investor. If you decide to invest on Lendermarket, then all offered loans have a Buyback Guarantee.
Buckle up and get ready!
What is a Buyback Guarantee?
The way P2P lending and P2P platforms work can be different, but the majority follow the principles outlined below:
A loan originator like Creditstar, Credory, QuickCheck or CrediFace has a portfolio of loans, for example consumer loans or real estate backed loans. These are fully funded by the respective companies / loan originators.
To raise capital to fund these loans, these companies can decide to issue bonds, sell stock, or issue loans on P2P platforms where in turn retail investors have access to invest in high-interest assets with small barriers to entry. It’s a win-win for both investors and loan originators.
Now, if you invest in one of these loans, you’ll get your interest rate as well as principal repayments. These payments usually occur once a month. Here’s where the Buyback Guarantee comes in:
- On occasions, a loan invested in by a Lendermarket investor to a loan originator may enter into an “Overdue” period. This can be due to the underlying lendee being unable to repay their loan issued by the loan originator.
- If the loan originator offers a Buyback Guarantee, then after an investor’s loan is overdue for a certain period of time (at Lendermarket – 60 days), the loan is bought back by the loan originator and the principal plus accrued interest is paid back to the investor.
On Lendermarket, you will earn interest on the delayed loans and sometimes the returns can be even higher, due to additional late fees imposed on the lendee that are taken over by the loan originator.
There are two forms of Buyback Guarantee, which we’ll dive deeper on in these sections: Buyback Guarantee and Group Buyback Guarantee. Let’s tackle the first one: a Buyback Guarantee:
Buyback Guarantees are offered by the loan originators. All loan originators on Lendermarket are obliged to offer a Buyback Guarantee and to prove that they have the means to fulfill their obligations in this respect.
So, in short, a Buyback Guarantee is issued by the loan originator itself.
On top of the standard guarantee, there may also be a Group Guarantee. In some cases, loan originators are not a single entity, but also have parent companies with bigger financial resources.
This means that if the loan originator itself can not fulfill the guarantee and pay back all outstanding loans, the parent company steps in to cover any obligations. This adds a layer of security, provided the parent company has the necessary means.
How does the Buyback Guarantee work?
From an investor’s point of view, the worst thing that could happen when investing into P2P loans is that their loan defaults and they lose some or all of their money. The Buyback Guarantee shifts the default risk from the single investor to the loan originator (or it’s parent company), making an investment into unsecured loans more attractive.
If a loan goes into the “Overdue” phase on Lendermarket, it will be bought back after 60 days and everything will be paid back to you, including accrued interest. This is an automatic process, and if you set up Auto Invest it will continue investing the funds into new loans.
From the perspective of the loan originator, it’s their responsibility to buy back the loans and pay back the outstanding amounts to investors. Therefore, it’s imperative that they keep enough cash around, to be able to compensate for any defaults.
How can loan originators finance the loss?
Defaults are no rare occurrence in the land of P2P lending, but loan originators know that. Many companies that have been lending in their respective markets for a number of years, have lots of data to look back on to see the average default risk and adjust their interest rates accordingly.
It’s important to note: investors on platforms like Lendermarket earn some of the highest returns available for investment products of this nature. These returns are possible as the loan originators usually charge even higher interest rates on the loans that they issue.
A small share of the returns from the underlying loans issued goes to the platform offering the loans (such as Lendermarket), an average of 12 – 14% goes to the investors and the rest stays with the loan originators to cover cost of operations, defaults, and as profits.
There are cases when Loan originators may extend their loans to Lendermarket investors. For example, upon the request of a borrower, an Loan originator may agree to grant an extension to help the borrower pay back the loan.
These extensions will also be reflected on Lendermarket. Some loans invested in by Lendermarket investors can be extended up to 6 times and up to 30 days per extension. In this case, the total number of possible extension days is 180.
As per each lending company’s agreement with the borrower, it is also possible to extend late loans. For example, Creditstar can extend the duration of a loan for up to 180 days (6 times, each extension for up to 30 days). According to Creditstar’s buyback agreement, a loan should be bought back after 60 days, bringing the maximum total number of late days to 240. If an extension is applied to the loan you are invested in, you will receive the accrued interest until the start date of the extension and continue to earn the same interest throughout the extension period until the loan is either repaid or bought back.
In the case of Creditstar, loans may be overdue but may be made current by extending such loans up to 6 times (for up to 180 days in total).It is important to note that each lending company has its own extension policy.
Under what circumstances might a Lendermarket investor lose some or all of its investment?
It is important to note that investments made on Lendermarket are not risk free and investors may lose some or all of the value of their investments. Given that there is a Buyback Guarantee in place with all Lendermarket Loan originators, investors will only suffer losses on their investments if the Loan Originator that they are investing with is unable to repay their loans that they have been issued by Lendermarket investors i.e. they become insolvent.
Fortunately, Lendermarket investors have not suffered any losses on their investments to date.
In order to protect investors, Lendermarket conducts rigorous due diligence on all new Loan Originators onboarded on to the platform. This involves not only inspecting the Loan originator company and their finances, but a thorough inspection of the Loan originator’s portfolio of loans. Lendermarket also conducts quarterly monitoring of Loan originators and their portfolios. If any issues arise as part of this quarterly monitoring, Lendermarket will raise this with the Loan originator. In rare cases where Lendermarket has a significant issue with the Loan originator, it will take necessary measures to protect the investors by imposing credit limits on loans issued on the platform, or if necessary, calling in the loans on behalf of investors.
Buyback Guarantees provide additional protections to those who want to avail of the high returns offered by investing with Loan originators on Lendermarket. Lendermarket has robust due diligence and monitoring processes in place to ensure the creditworthiness of these Loan originators. However, investors should inform their investment decisions by doing their own due diligence and research on the risk profile of the Loan originators they are investing with to understand the types of loans they issue, the market(s) they operate in and the financial soundness of their operations.