P2P Lending & Buyback Guarantee Explained
Have you been wondering what is the buyback guarantee in connection to P2P lending?
Many P2P investors praise about investing only in loans with a buyback guarantee – that way you won’t lose your investment. Is this statement true and can you rely on this?
In this article, I will dig deeper into the buyback guarantee that is offered by many P2P lending platforms. I will explain the differences between buyback guarantees so you are aware of how this guarantee protects your money.
Buyback Guarantee – Definition
If you read about a buyback guarantee in connection to P2P lending, most users define it as follows.
A buyback guarantee is the promise of the loan originator to buy back your investment into a loan if the borrower is late with its payments for more than 60 days.
This is the oversimplified definition of a buyback guarantee. If you want to learn more about this “protection” you should keep reading.
Buyback Guarantee – Differences
Note, that not every platform that offers a buyback guarantee has the same conditions.
Every P2P lending site has its own agreements with loan originators. Some platforms don’t even cooperate with loan originators but fund projects directly with the borrower.
Some lending sites offer only a buyback guarantee whereas other P2P platforms offer some kind of collateral, mortgages or even no protection at all.
Bottom line is, buyback guarantee isn’t the same with all P2P lending platforms. Most platforms offer the buyback guarantee if you are investing in unsecured personal loans, meaning there is no collateral or other securities connected to the loan.
The buyback guarantee is, therefore, a good way to make the investment for the investor more attractive. The risk with the borrower shifts back from the investor to the loan originator – in theory. Learn more about it in my article: How safe is P2P lending.
Here is a breakdown of different buyback guarantees offered by platforms where I am an active investor myself:
Mintos Buyback Guarantee: Your investment will be repurchased after 60 days of delayed payment. Some loan originators don’t pay interest on delayed payments but only repurchase your initial loan investment. There is no further protection if you invest in personal loans. Read my Mintos review to find out more.
PeerBerry Buyback Guarantee: Your investment will be repurchased after 60 days of delayed payment. All loan originators will pay back your investment with outstanding interest. Learn more in my PeerBerry review.
Robocash Buyback Guarantee: Your investment will be repurchased after 30 days of delayed payment. All loan originators will pay back your investment with outstanding interest. Invest on Robocash here.
EstateGuru Buyback Guarantee: There are currently no plans to introduce buyback guarantee on EstateGuru anytime soon. EstateGuru offers, however, secured investments as their loans are backed by properties and therefore real value. Read more about it here.
Crowdestor Buyback Guarantee: Crowdestor doesn’t offer a buyback guarantee as most of the P2P investors are used to. The platform devotes a 1 – 2% commission of each funded project into a buyback fund. In the unlikely case that a borrower won’t be able to pay back the loan and the collateral would not cover the loss, the buyback fund will be used to repay the investors. Considering the size of the projects, the buyback fund on Crowdestor could at the moment cover only a part of the loss.
By now, you should know that buyback guarantee can have many forms and meanings. That alone is something you should be aware of when investing in P2P loans.
It’s no secret that loans that come with a buyback guarantee offer lower interest rates. At the end of the day, the loan originator buys back your claim and takes over the risk.
For some reason, many investors don’t mind it as long as there are no defaults in their investment accounts. That’s also the reason, why many P2P lending sites offer buyback guarantee.
Note, that the loan company that lists their loans on the platform takes a huge cut from the interest on loans with a buyback guarantee.
If you are risk-friendly and want don’t mind defaulted loans in exchange for a higher interest rate, you can also invest on other platforms such as Bondora or FinBee. Those P2P lending sites don’t offer a buyback guarantee but lists their loans with 20% of interest or even higher. Be aware, however, that there will be some defaulted loans that you need to account for. Only time will tell if your net returns will be higher as compared to your investments in loans with a buyback guarantee.
No interest on delayed payments
As you might have noticed already, some P2P lending sites list loan originators that don’t pay out interest on delayed payments, meaning that your investment doesn’t earn any interest while the payment is delayed.
This issue is particularly familiar to investors on Mintos. There is only one way to avoid this and that’s filtering your loan originators in your Mintos Auto Invest and choosing only those that pay out interest on delayed payments.
This can, however, cause even more cash drag as there is currently (end of 2019) a low supply of loans and your Auto Invest might not work if you set your criteria too strict. I suggest investing on alternative platforms like PeerBerry or Robocash to avoid this temporary cash drag.
Loans with a buyback guarantee are specially marked
Whereas some P2P lending sites list only loans with a buyback guarantee, there are still some loan originators that don’t support this feature. On Mintos for example, loans with a buyback guarantee are specifically marked with a shield.
If you only want to invest in loans with a buyback guarantee, make sure to pay attention to this.
Can I rely on the buyback guarantee?
Some P2P lending platforms have an agreement with the loan originators who offer the buyback guarantee, others don’t.
The fact is, that P2P lending is a risky investment and the buyback guarantee might help to lower the risk of default, however, it’s not the ultimate solution. You can’t compare it to a deposit protection scheme that’s protecting your savings accounts.
I have been investing in P2P loans since 2017 and I have not had a single defaulted loan. Can you rely on the buyback guarantee in the future as well? No one can predict the future and there is no guarantee that all loan companies will be profitable in the future either. There are many risks that you as an investor can’t control.
As for myself, I use the platforms and invest in loans with a buyback guarantee, but I also invest in loans that aren’t secured by a buyback guarantee but mortgages, collateral or personal guarantees. I believe that the only way to lower your risk of default is to diversify your investments across various loan types with different protection schemes.
If you spread your investments across at least three to four platforms and invest in loans with different securities you are certainly better off as if you would only stick to one platform (at least in terms of risk diversification).
Don’t base your investment decisions only on whether there is a buyback guarantee or not. There are far more factors that you should include in your investment decisions than the buyback guarantee. A buyback guarantee is also only as good as the financial situation of the loan originator. As soon as the loan originator won’t perform, any buyback guarantee is suspended.
I hope this post could teach you more about the buyback guarantee connected to P2P lending. If there is something I didn’t mention or if you want to add a comment or question about this topic – feel free to use the comment section below.