The risk of default is the biggest risk in crowdlending investments. Delinquencies on some types of loans can be very high. To minimise this risk and encourage investors to put their capital into these types of investments, some P2P lending platforms offer buyback guarantees.
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what is a buyback guarantee?
Imagine you have invested in a loan and the borrower (the borrower) does not repay it (the borrower) does not pay the agreed amount. If you have a buyback guarantee the originator of the loan (the company that gave you the loan) will buy back the defaulted loan from you the defaulted loan, i.e. it will pay you the amount corresponding to the money you have corresponding to the money you have lent plus accrued interest. So, in theory, you would never lose your money, in theory, you would never lose your money due to default.
how does the buyback guarantee work?
You may be wondering: why would they buy back a defaulted loan? what’s the catch?
The buyback guarantee encourage investment by minimising the investor’s risk. It is mainly supported by the following on the following basis:
- Loans with a buyback guarantee usually offer lower interest, as part of the money goes into the fund to cover the buyback guarantee.
- On the other hand, the loan originator applies its recovery process on these repurchased loans and recovers in many cases the money with additional fees for payment delays.
On each platform the conditions are slightly different slightly different.
Some offer a buy-back guarantee on all their loans, others only on some loans or originators.
Each platform sets a certain time frame for buying back the loan in case of default. For example, on most platforms the buyback guarantee is executed after 60 days of default, however on this happens after 30 days of loan arrears.
Normally it is the loan originator who will repurchase the defaulted loan. This means that, in platforms that act as marketplaces, where we can invest in different originators, it is the loan originator who buys back the loan, not the marketplace platform.
With buyback guarantee, is the risk of investing in crowdlending completely eliminated?
No, there is still risk. If the loan originator were to go bankrupt, it would not be able to take over the buyback guarantee.
The risk of default is the biggest risk of investing in crowdlending, but not the only risk crowdlending, but not the only one. Even if you invest in loans with buyback collateral, there is still the risk of default collateral, there is still the risk of the platform and the risk of the originator.
In this other article you will find the keys to minimise all the risks of investing in crowdlending.
Other types of buyback collateral
Buyback capital collateral
In this case the buyback guarantee only covers the loan capital, but not the interest. This means that in the event that the loan defaults and this guarantee has to be this means that if the loan defaults and this guarantee has to be applied, you will not lose your money, but you will no longer earn the interest you would have earned on the loan you will not lose your money, but you will stop earning the interest that would have been due to you.
Partial buyback guarantee
This type of guarantee only covers part of the capital invested.
Guaranteed repayment
In case of default on the loan instalments, the originator guarantees the monthly payments on behalf of the borrower. When this type of guarantee is applied, the loan is not repurchased, the investor continues to hold the loan until maturity.
Buyback Guarantee Fund
A small fee paid by either investors or borrowers creates a pool of money to cover possible defaults. If this happens, the distribution would be made according to the rules set out in the fund agreement.
Investing in P2P loans with buyback guarantee
Advantages of investing in P2P loans with buyback guarantee
- It is a security guarantee. You avoid the risk of default, which is usually high, especially in microloans, which have no other type of collateral any other type of collateral.
- You will receive the expected returns, regardless of whether or not there is a default.
Disadvantages of investing in buyback loans
- Lower interest rates are to be expected, to cover the collateral fund.
- Some platforms do not clearly explain how the buyback guarantee works. However, you can always ask them for more information on these and other conditions before investing.
Crowdlending platforms that offer buyback guarantees
These are some of the P2P platforms that offer buyback guarantee on all or some of their loans. We recommend that you check the buyback guarantee conditions of each one of them before you start investing.
should I only invest in loans with buyback?
It depends. It’s a very personal decision. It all depends on the risk you are willing to take.
I personally invest in both. Usually the non-buyback loans I invest in have some collateral, such as mortgage collateral, which reduces the risk of default. For microloans, I prefer to invest only in those with buyback guarantee.
A good strategy could include both loans with and without buyback guarantee and other collaterals, with a well-diversified portfolio across loans, platforms and originators.
