Buyback Guarantee Explained
P2P lending has become a very popular alternative investment method in the last few years, and if you’ve been keeping on top of the European P2P lending game, you will have come across the term ‘buyback guarantee’. A buyback guarantee is a protection scheme offered on platforms that
In this guide, you will find out exactly what a buyback guarantee is and whether you should use it as a metric to evaluate and compare P2P lending sites. We will also show you the most popular P2P lending platforms with buyback guarantees.
What is a Buyback Guarantee?
The buyback guarantee is a security mechanism used by 16 European P2P lending platforms; we’ll get these later. Mintos was the first mainstream P2P lending marketplace to introduce a buyback guarantee which allowed investors to sell their investments back to the loan originator once the borrower is late with payment by over 60 days.
Mintos Buyback Guarantee
Mintos offers a 60-day buyback guarantee for all its loans. This guarantee is provided by the lending companies that list loans on Mintos.
As we have witnessed this year, Mintos has difficulties to legally enforce this buyback guarantee. Lenders like Varks or Capital Service and many others offered a buyback guarantee for all of their investments until they have stopped fulfilling their obligations towards investors.
Even lenders that have a seemingly good Mintos rating and provided a buyback guarantee have been suspended in the past and investors' money was locked.
If you decide to invest your money on Mintos you should not rely on the buyback guarantee as many investors have already witnessed that this isn't a real protection of their investments.
Why do Investors Choose to Invest on Platforms with Buyback Guarantees?
The buyback guarantee is an amazing marketing tool that the majority of European P2P lending sites offer to attract new investors. But why does this protection scheme increase investors’ trust in a platform?
The choice is simple. Would you rather see your delayed loans bought back or defaulting? Most investors choose the former, and that leads them to look out for platforms that offer a buyback guarantee.
P2P Lending Sites with Buyback Guarantees
While there are many P2P platforms that promote their buyback guarantees as protection schemes, not all of these buyback guarantees are the same. On some platforms, the buyback kicks in after only a few days, while on others it can take up to two or three months.
Let’s have a look at which platforms offer the greatest and the least protection through their buyback schemes:
|P2P Platforms with Buyback Guarantees||Average Interest||Buyback Guarantee||Inclusion of late payment fees and accrued interest?|
|Bondster||12.51%||30, 60 days||Yes|
|Viventor||13.2%||30, 60 and 90 days||Yes|
|Viainvest||11%||30 days||Not disclosed|
|DoFinance||8%||30, 60 days||Yes|
|Debitum Network||8.44%||90 days||Yes|
|Fast Invest||12.04%||3, 7, 15 days||Yes|
To get more information about a particular platform’s protection schemes, read our dedicated P2P lending platform reviews.
Or, if you want to read more on buyback guarantees, keep scrolling as we’ve lots more to share!
Who Provides the Buyback Guarantee and Why?
In the vast majority of cases, the buyback guarantee as we know it is provided by loan originators rather than platforms themselves. This means that particular P2P lending platforms are not reliable for the fulfillment of their buyback guarantees.
On P2P lending marketplaces such as Mintos or PeerBerry, the loan originator repurchases the investor’s claim against the borrower.
This means that the default risk shifts from the investor back to the loan originator. To put it simply, you as an investor get the money back while the loan originator takes care of the debt collection.
What is Group Guarantee?
In certain cases, large loan providers operate their own P2P lending platform, which gives them access to additional funding of their loan portfolios. On some marketplaces like Mintos or PeerBerry, large loan companies offer an additional buyback guarantee for their loan originators.
This means that if the loan originator is unable to cover the buyback guarantee on its own, the parent company (which usually has much larger financial resources) will cover this obligation.
Small Details that Influence Your Returns
Most investors don’t pay too much attention to the terms that apply to the buyback guarantee.
You should though; the finer details can cost you significant return losses or gains.
For example, while most platforms offer a buyback guarantee that covers accrued interest for delayed payments as well as a penalty fee, this is not always the case.
Here is a screenshot from Acema: an established loan originator based in Czech Republic. While this loan originator has an exceptional track record and lists loans on P2P lending giants like Mintos and Bondster, their buyback guarantee terms often don’t work in favor of the investor.
If you as an investor invest in loans from Acema and the borrower is late with their payments, you will receive a penalty fee of 0.05% but no interest.
Let’s use an example to clearly understand the severity of this situation:
Imagine you have invested a few thousand euros in loans from Acema and a good few of them are delayed, you could have up to two months where your money won’t earn you any interest!
In order to avoid this situation, we suggest going through every loan originator on Mintos and setting up your auto invest in a way where you exclude loan originators that don’t pay interest on delayed payments.
This is one of the advanced Mintos strategies that we apply on our own loan portfolio on Mintos.
Who Pays For The Buyback Guarantee?
So, someone has to pay for the buyback guarantee: the defaults and cost of loan collection. In order to fund the buyback guarantee the loan originators take a cut of the interest paid by the borrower, which essentially means investors indirectly pay for the buyback guarantee as they receive less interest.
P2P lending is a great source of funding for short-term loans that have interest higher than 100% per annum. You, as an investor, will get approximately 10% interest and the P2P lending platform takes a cut while the rest remains with the loan originator.
When you click on the loan originators on Mintos, you can see for yourself how much the company charges for their loans.
P2P loans that are covered by the buyback guarantee tend to have lower interest rates than those that do not come with a protection scheme. This means that loans that aren’t backed by a guarantee tend to have a much higher interest rate but also a higher default rate. If you want to give a platform without a buyback guarantee a try, sign up on Bondora - the most popular platform for investments of this nature.
Can You Rely on the Buyback Guarantee?
The buyback guarantee gives many new P2P investors the impression that there is no way to lose money through P2P lending as the loan originator or the platform will always repurchase delayed loans.
Don’t be fooled, however, as this is only an illusion.
The buyback guarantee does not by any means ensure that your money is 100% secured. Remember, on most of the platforms that offer a buyback guarantee, you are investing in unsecured loans.
While the buyback guarantee works in normal market conditions, where the demand for P2P lending is increasing, it’s not bullet proof.
External and macroeconomic factors can have a big negative impact on loan originators. Kosovo’s Monego, one of the popular loan originators on Mintos, lost their licence to provide loan services. As a result of this political decision Monego had to close their business.
Thousands of investors are now waiting to receive their money back. Mintos recently announced that the first tranche of funds should be distributed to Mintos investors in April 2020.
While Monego offered a buyback guarantee, there is no real guarantee that investors will receive all their money back.
Unfortunately, the hype around P2P lending attracted a few platforms that exploited this opportunity and stole millions of euros from fellow investors. At the beginning of 2020, two platforms Kuetzal and Envestio disappeared with investors’ money. On Envestio alone, investors lost over €33 million and guess what? Envestio also offered a buyback guarantee.
It’s not easy to spot scams right away, which is why every investor should do their own due diligence and decide whether they want to invest on a platform.
As we write this guide, it has been over two months since the Envestio scandal was announced. Some P2P lending review sites still represent Envestio as “an excellent crowdlending platform”. We suggest that you always double check the source of your information and its accuracy.
We, at P2P Empire, update our P2P lending reviews regularly to give you the most accurate and factual information. The P2P lending space is, however, changing rapidly and even we cannot always guarantee 100% accuracy of our data, as (while we do try!) we cannot track all of the changes to P2P lending sites’ terms and conditions.
A Final Word From P2P Empire
Do your own research and keep track of your investments on a regular basis to spot potential red flags that can help save your investments.
Remember that diversification across trustworthy platforms and various loan types is, in general, a much better investment strategy than investing solely in loans that are covered by a buyback guarantee.