Investing in loans is easy, with many advantages over other investment options such as stocks and shares. In this article you can find many of the things you need to know.
What is a loan and how does investing in loans work?
A loan is given by the loan originator to the borrower on certain terms. A loan originator is a non-bank lender that is co-operating with Income marketplace and has given out a loan to a borrower. The borrower (consumer or small business) agrees to repay the loan within an agreed time, and to pay interest to the loan originator.
When an investor invests in a loan, it means that they buy a part of this loan agreement, and receive part of the capital repayments, and an agreed amount of interest for the investment.
For example; if there is a € 1000loan issued by a loan originator to a borrower, the investor can buy x% of that loan. If the investor invests €100 (10% of the principal of the loan), then they are entitled 10% of the principal repayments, + a part of the interest agreed with the loan originator (on Income marketplace this is between 7% – 12% annually)
How do the repayments work?
Every loan has a schedule agreed between the loan originator and the borrower, determining the repayment date of the loan. The duration of the loan can vary from a few days to years. Some short term loans are usually paid back fully on the repayment date, longer instalment loans usually have monthly repayments.
In the case of monthly loan repayments, if an investor invests in a loan with a duration of 12 months, they will receive repayments of a principal 1/12 every month for 12 months, until the loan is fully repaid. The investor will also be paid the agreed interest rate for outstanding principal.
Using an autoinvest feature, the monthly principal repayments and earned interest can be re-invested which boosts the returns of the investor.
What if the borrower does not repay?
In modern P2P marketplaces, most loans come with a buyback guarantee (also called a buyback obligation) which is an obligation of the loan originator to buy the loan back from the investor if the loan payments are more than 60 days late. This means that after 60 days delay, the full investment is bought back and the investor receives back all the principal and interest from the full period their funds have been invested.
Why invest in loans?
Investing in loans can be very rewarding as the returns are high even during periods of high inflation. Their performance also does not generally correlate with other established assets such as stocks or crypto, which makes investing in loans a great alternative at times when the rest of the market seems overvalued.
Loans also provide a monthly cashflow, as the loans get repaid, so does the investment. The repayments and earned interest can then be easily re-invested or withdrawn if other investment opportunities arise. This cashflow element of loans makes them an excellent option to keep excess cash in an asset that is independent from other markets.
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