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Should You Trust Lender Ratings?

Thinking about using lender ratings to diversify your P2P portfolio? Read this guide before you do so!


How to Protect Your Money when Investing in Loan Originators

You should always know where you’re putting your money; this is one of the basic fundamentals when it comes to investing. The same rule applies when P2P lending. Being aware of the risks and the companies you invest in will increase the safety of your investments.

In this article, we explain why it's important to know the loan originators you’re investing into, and how to lower your risk by choosing strong and profitable ones.

What’s a Loan Originator?

A loan originator or lending company is a non-banking lender that lends money to borrowers. This loan originator often funds its loans via P2P marketplaces or P2P platforms, and investors can use those P2P lending sites to invest in loans from individual loan originators.

Over the past few months, many lending companies were suspended from the P2P marketplace Mintos.

The main reasons were the revocation of lending licenses and simply poor and unlawful business practices.

If you’re an active Mintos investor, you were likely impacted as well. The best way to check is by having a look at your portfolio and seeing whether you have loans that you simply can’t sell.

The table below is a list of all the loans suspended lending companies:

mintos suspended lenders

Some of the suspended lending companies are paying back the outstanding balance, this is not, however, the case with all of them, and it’s also unclear whether investors who have invested in these loans will receive their money back.

This leads us to the question of whether you should choose individual loan originators, and to what extent you can minimize potential losses.

To answer this question, define the following:

  1. What’s your investment term?
  2. How much time do you want to spend analyzing loan originators?

How Long Do You Want to Invest Your Money?

If you’re just starting out with P2P lending, you might want to invest in microloans to have the flexibility of withdrawing your funds within a short period.

There is, however, another way to go about this as well.

You can always sell your investments on the secondary market if you can find a buyer.

Often you’ll need to pay for early exits in the form of platform fees or discounts from your investments.

If you have been investing in P2P loans for a while, you might want to consider investing long-term, which would of course, mean you won’t have access to your money for several months.

Why is it important to decide your investment period before you choose your loan originator?

Your investment period will have an impact on the availability of loans that match your investment strategy.

Here is a chart of the loans currently available on Mintos.

mintos lender diversification

As you can see, most loans are from Sun Finance, and there are also a considerable number from Finko and ID Finance. The majority of the loans are short-term or personal loans - meaning they are unsecured.

Investing in Short-Term Loans

If you want to solely invest in short-term loans, you will end up with the following options:

mintos short term lenders

Out of 70 loan originators, you’ll only be able to invest in seven. As you can see, if you don’t diversify properly, you might end up investing most of your funds in Sun Finance.

Investing in Personal Loans

When it comes to investing in personal loans with a longer loan term, your diversification options are slightly better.

mintos lender diversification

In this graph, you can see that IDF EUROASIA lists the most loans within this category.

At the time of writing, the last financial report from this lender is from 2018. The lender’s main markets include Kazakhstan which has been impacted heavily by imposed moratoriums (payment holidays) and the number of outstanding payments with this loan originator is also increasing.

Is this the safest lender? Probably not.

Based on your investment preferences, you should keep the exposure of your investments with individual loan originators in mind. If you don’t diversify evenly, you might end up with a huge chunk of loans from only one loan originator.

And, if this company goes bust, your portfolio is likely gone as well.

Your investment options are limited by your investment period. As we have shown you above, you won’t be able to diversify across many lending companies if you only invest short-term.

Distribute Your Investments Evenly

The solution here is to diversify evenly across the loan originators that you choose. You can either use the diversification settings within your auto invest tool, or create multiple automated investments for individual lending companies.

This is something you should do if your P2P marketplace doesn’t allow you to set up the diversification settings.

mintos lender autoinvest

This screenshot is solely for representative purposes. We have exited our investments on Mintos. Read our Mintos review to find out why.

Note that this only works if the lending companies actually have available loans listed on the platform that match your investment term and other Auto Invest preferences.

If that’s not the case, you will suffer from cash drag as your automated strategy won’t find enough available loans that match your criteria.

And, as you know, cash drag means uninvested funds that won’t be earning any interest.

What’s the Catch?

The above-mentioned strategy will absorb potentially weak loan originators.

If you invest in 30 lenders, your exposure in one lending company is around 3.3% of your portfolio.

If you expect to earn 10% interest per year and one company goes bust, you will lose the equivalent of the interest from four months with one lender.

Make sense? See how we worked this out below:

10% ÷ 12 months x 4 months = 3.3%

Ok, let’s say, you can absorb those losses.

But what happens if six lending companies go bust within two months (which has been the case on Mintos since April 2020!)? (Update June 2020 - it's seven by now)

If you’ve invested in those lenders by investing 3.3% of your funds, you’ve just lost 20% of your portfolio. Which, needless to say, is a sizable chunk!

p2p loan originator diversification

Sure, some of that you might eventually recover. But it can take months or years, as you can see in the above diagram of Aforti, which is a lender that was suspended on Mintos back in August 2019.

Even now, investors still haven’t received their money back.

20% equals two years of returns from across your entire portfolio, if we take into account that you earn 10% of interest annually. And that’s just to get back to where you started!

Also, bear in mind that we’re only talking about the suspended companies here.

There are plenty of other troublesome lenders on Mintos which are facing heavy criticism from investors due to buybacks or pending payments.

You can read the latest news announcements on Mintos’ blog to get a better picture of the current situation.

If, after learning about all of these events, you are still comfortable investing your money on Mintos, you should seriously consider selecting your loan originators as Mintos hasn’t been as badly affected by those suspensions since the marketplace stopped investing in these loans.

Mintos isn’t at risk, but your money is.

How to Choose Your Loan Originators

If you decide to choose your own loan originators, your goal is to limit potential losses.

Before we get into the details, you should know that you will never be able to limit all the risks, regardless of how much time you spend in researching individual lending companies.

Read more: Is P2P Lending Safe?

So, how do you decide which companies you should invest your money in?

Good question. Let’s start with lender ratings.

Mintos Lender Ratings

You have heard about the Mintos lender ratings, right?

Well, these lender ratings are formed on the following:

  • The loan performance
  • Interview with its management
  • Audited and interim financial statements
  • Corporate presentation
  • Credit policy
  • Risk control documents

The P2P marketplace analyses those metrics and assigns ratings from A+ to D.

mintos lender rating

If you are a newbie, this rating system will give you some sense of security. You can simply exclude C ratings if you want to eliminate the ‘elevated risk’ from your portfolio... Right?

Wrong.

Mintos can change the rating of a lending company from B+ to C, or worse, at any time!

So, in theory, you could invest in B+ loans with a duration of several months and next week those loans could become C ratings.

What’s the point of those ratings, then?

Marketing. Do you really think that Mintos would onboard a company and assign a C- rating?

It wouldn’t make sense to do this.

Mintos receives a commission from the lending companies as the marketplace collects funds from investors so the loan originators can use the leverage to expand within their markets.

Mintos isn’t always the fastest when it comes to updating those ratings either, which suggests that you shouldn’t be relying on them too much.

Third-Party Lender Ratings

Right, so you can’t rely on the accuracy of Mintos’s ratings. So, how about trying third-party options instead? There are several websites in the P2P lending space that try to imitate the Mintos lender ratings by providing their own, adjusted ratings.

Usually, these third-party ratings are slightly worse than those on Mintos, which might give you the impression that these are more reliable.

But, we’ve run analysis on some of the suggested ratings ourselves and found a few errors when comparing financial data presented on these third-party websites with data in the individual companies’ financial reports.

So, there is some margin of error which you should keep in mind.

Most of the time, those ratings also base the data on the same information that you can find on Mintos or other marketplaces like Viventor and PeerBerry.

The ratings are typically based on historical data which means that you’re basing your investment decisions on information that’s likely outdated and that’s a risky bet in our opinion.

Past performance isn’t always an accurate indicator of how future investments will look. Take our current situation, and the uncertainty we’re all faced with at the moment, as an example!

Many loan originators work in emerging markets. There are plenty of external factors that those lender rankings don’t consider.

There’s no way you can estimate the political or currency risk unless you are a certified expert within the field.

And, if you are an expert, you probably wouldn’t invest in P2P lending as your knowledge could be the source of higher returns elsewhere.

We’re not even talking about the unexpected risks that might impact your investment performance, like the current pandemic.

The performance of those lending companies isn’t like it was in 2018 or 2019. Many loan originators are overleveraged (meaning they don’t have enough equity to cover all the defaults).

And third-party Mintos lender ratings don’t consider this, which renders them obsolete.

This is obvious to anyone who has spent some time researching information about lenders and understands the risk of P2P lending.

Conduct Your Own Research

If you really want to limit your exposure in weak loan originators you need to conduct your own research.

It’s no good looking for a magic rating that will give you all the information you need and eliminate the risk involved with P2P lending.

You need to complete your own investigative research, make your own conclusion of the lending company, and take responsibility for your investment decisions.

Here’s a checklist you can use to find the most reliable loan originators. We’ve provided answers too, so you can see what exactly you should be aiming for:

  • Did the loan originator publish their latest financial reports? Yes
  • Are these reports audited? Yes
  • What’s the profitability of the company and how did it evolve in the last few years? Idealy the profits have increased last year.
  • What’s the ratio between the equity (company’s own funds) and liabilities (investors’ funds)? There should be enough equity to cover the liabilities.
  • What’s the current portfolio size (assets)? Repayments of loans will help fund new loans and repay investors.
  • Does the lending company share quarterly or monthly results? Yes
  • Does the lending company share important information with its investors through a blog, newsletter, or interviews? Yes, and they’re informative, regular and accurate.
  • How long has the company been operating? 3 years +
  • In what markets is the company active? And are these markets regulated? Consider the market risk.

These are some of the points we follow when estimating individual loan originators.

If you decide to follow this path, you won’t be a passive investor, but rather an active one as completing this research is very time-consuming.

But there aren’t any shortcuts you can take to try and do this more efficiently.

Often, you won’t even be able to find all of the information as the lending company might not have published anything on it.

Hot tip! If the lending company hasn’t published any data in the last four to six months, you should stay away from it.

Expand Beyond Mintos

Mintos is the market leader which puts the company in a very comfortable situation. The platform can dictate their terms and, if you want to invest there, you need to obey them. Luckily, there are alternatives to Mintos! PeerBerry, for example, lists loans from only three financial groups.

This direct collaboration results in better monitoring practices. By investing on PeerBerry, you don’t need to compromise anywhere, as all the features work as you expect.

Often it’s better to invest in solid loan originators backed by large and profitable finance groups rather than in many small overleveraged lenders on Mintos.

Key takeaway: Loan originators are not only found on Mintos.

You should definitely consider lending companies like TWINO, VIAINVEST, Robocash, NEO Finance, and Bondora which are loan originators that list their own loans on their own P2P lending platforms. The above lending companies are often much more transparent than those on Mintos or other P2P marketplaces.

Mintos also decreases investors’ returns as:

  • Investors don’t receive interest for ‘pending payments’
  • Investors accept that the loan originators rebuy their loans and re-list them on the marketplace for lower interest rates

Some large loan originators such as Credistar or Placet Group have already launched their own P2P lending sites: Lendermarket and Moncera. Credissimo is also operating its own crypto-backed platform, Nexo.

This evolution suggests that many stronger lending companies will create their own platforms as they don’t need to pay a commission to the marketplace, which has one job: collecting investors’ money.

Hot tip! Don’t invest in the same loan originator on multiple platforms.

Here’s a list of loan originators that operate on multiple marketplaces:

  • Monify (operating on Viventor and Crowdestor)
  • Stikcredit (operating on Viventor, Mintos, Bondster and Grupeer)
  • IbanCar (operating on Iuvo Group, Grupeer and Viventor)
  • Kviku (operating on Mintos, Viventor, Bondster and Iuvo Group)
  • Acema (operating on Mintos and Bondster)
  • Lime (operating on Bondster and Mintos)
  • Right Choice Finance (operating on Bondster, Ekassa and Grupeer)

There aren’t many reasons why you would diversify your portfolio by investing in loans from the same loan originators, but on various platforms.

In fact, we believe that there can be disadvantages when investing in a loan originator that lists their loans on multiple platforms.

Why?

Because this basically means that the lending company is excessively using P2P marketplaces to fund their loans.

Why’s this bad? In our opinion, successful lending companies should have alternative funding sources, or fund a large portion of their loans on their own.

Having a variety of funding sources makes the business model much more sustainable and, by extension, your investments safer.

Funding 70% - 90% of the loan originator’s unsecured loans with your money is quite a risky game.

If you plan to invest larger sums of money, we suggest getting in touch with the P2P marketplace and requesting information about the requirements for lending companies when it comes to funding sources as most of the marketplaces don’t publicly share this information.

Look at Skin in The Game Ratio

Most payday loan companies (loan originators on Mintos) have 5% to 10% ‘skin in the game’, meaning from the loan amount of €1,000 they invest at least €50 of their own capital in the same loan in order to have a reason to recollect the debt.

This isn’t the case with Debitum Network, which is a P2B marketplace.

Here you can find loan originators that have up to 70% skin in the game.

debitum-skin

The interest from those loans is naturally lower, however, so is the risk.

Most of the assets on Debitum Network are also secured by collateral, and some are even insured.

This makes the P2B marketplace one of the least risky platforms to invest in at the moment.

A popular alternative to Debitum is Iuvo Group, where all loan originators have 30% skin in the game.

Expand Beyond Consumer Loans

Who said that you can only invest in consumer loans?

Business loans, backed by real estate collateral, are often a much better deal.

Your investments are secured by a first-rank mortgage, which makes any buyback guarantee by a weak loan originator look nothing short of a joke.

Even investments backed by real estate aren’t risk-free.

But the chance of losing money by investing on an established P2B real estate platform like EstateGuru is much lower than it is on Mintos.

p2p-diversification

Here’s one way to go about your P2P lending portfolio in 2020. To learn more about individual business models, read our latest guide where we explain P2P lending types in more detail.

Note that this suggestion is suitable for you if your portfolio is bigger than €50,000. If you’re just starting out with smaller amounts, you’ll be fine to stick to P2P marketplaces (with strong loan originators) and P2B real estate platforms like EstateGuru.

👉 How Many P2P Platforms Should You Invest On?

Summary | Final Thoughts

Choosing the right loan originators is certainly something you should consider in 2020 as many weak lending companies have defaulted this year, and even the most reliable platforms like Mintos aren’t able to protect your investments.

Here are some of the highlights that you should keep in mind when choosing loan originators:

  • Don’t trust Mintos to monitor the performance of loan originators
  • Don’t rely on the rating system
  • Do your own research about individual companies
  • Consider investing on other P2P lending sites that are more transparent
  • Don’t invest in the same loan originators on multiple marketplaces
  • Pay attention to how much lenders lend from P2P investors
  • Invest in lending companies with higher skin in the game ratio
  • Diversify across loans backed by a property

If you’ve been able to treat your P2P investments as a passive income so far, unfortunately, this is no longer a viable option.

It’s time for a change!

In 2020, P2P lending isn’t a passive investment, and if you’re going to treat it like it is, you will lose.

Browse through our P2P lending academy to learn more about P2P lending and how you can protect your investments.

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