As with any investment, investment through Monestro carries some degree of risk. Each investor is responsible for evaluating associated risks before making an investment.
1. Borrower Credit risk/Default risk
There is a possibility that the borrower will not make future scheduled payments; thus, the investor may lose part or all of the investment made. The amount of possible loss, if any, would depend on the loan risk. In the case of an unsecured loan (i.e. all loans made available on the platform), the repayment will depend on the successful recovery of outstanding amount from the borrower, resulting in a higher loss, if any, compared to the secured loan. Associated risks are mitigated by Loan Originators having to retain „Skin in the game“ and for investors to opt for loans with a Buyback Obligation.
2. Loan Originator’s Default risk
In the unlikely event that a Loan Originator goes out of business or fails to deliver its agreed obligations. This could result in outstanding claims and putting performance of the Buyback Obligation provision at risk. Monestro may (but is not obliged) to represent the investors in recovering their claims against the Loan Originator by, for example, enforcing the security (if any) provided to secure the Loan Originator’s obligations, assigning the investors’ claims to a third party (possibly for a fee which is lower than the nominal amount of the claim), entering into settlements or purchasing the claims from the investors using the reserve (if any). However, Monestro is not obliged to take any action.
3. Cash flow timing risk
All payments from an investment in a loan are directly linked to the borrower’s actual payments. There may be situations in which the borrower makes a payment after the scheduled payment date; as a result, the investor may receive cash flows later than expected. Depending on the loan agreement’s clauses and circumstances, the investor may be compensated for late payments with late payment fees (penalty).
4. Prepayment risk
The borrower usually can repay the loan early, which is generally done by repaying the principal and accrued interest up to the date of early repayment. If the investor had invested at a premium, the investor would lose the premium’s unamortised part.
5. Reinvestment and Liquidity risks
There is a possibility of loss when re-investing earned profit in a loan with a lower interest rate or when earned profit remains non-invested on your account. Therefore, it is advised to closely follow payment schedules or, as well as to adjust and think through your Auto invest plan.
Additionally, when selling your investment on Secondary Market – it is advised to keep in mind that there is a possible risk of not acquiring a buyer fast enough. Therefore, it is reasonable to make your loan more attractive for buyers using the sell at a discount or premium dynamics.
6. Monestro default risk
In the unlikely event of Monestro’s insolvency, investors will be given full information from Monestro’s database on the transactions they have concluded within the Marketplace framework. The insolvency administrator of Monestro may transfer the servicing of all loans and investments to an appropriate manager, if reasonably possible.
7. Market, legislation, economic downturn risk
As with any financial market – the market for P2P loan investment can experience changes and fluctuations. The Estonian Ministry of Finance is preparing a new draft law which aims to cover different P2P and crowdfunding models and is expected to be adopted in late 2021. These changes can affect our business model and processes in the future. To mitigate and forecast this risk, we are examining Loan Originator’s economic environment and monitoring ongoing changes in its regulations as part of our Due Diligence.
With numerous factors such as economic downturns, crisis and certain geopolitical events, it is hard to predict adverse effects and future outcomes. As with other investment fields, these factors could affect the overall market – and thus the value of your investment and its liquidity. Therefore it is suggested to diversify your investments among different asset types and across geographies.