‘How secure are Monestro P2P loans?’ may well be one of the first questions that go through your mind if you consider P2P investing as an alternative investment vehicle.
Enticing returns may have caught your attention, but concerns about the risk to your capital are still a deciding factor in deciding whether to invest or not.
The short answer is that there will always be an element of risk, like most savings or investment strategies, so your money can’t be 100% safe.
However, what is possible is to manage your money in a way that limits your risk exposure – you need to understand, be comfortable with, and know how to deal with any risks your money is subject to.
What are the risks when investing in P2P loans?
The first thing to help minimise risk is to understand them. Briefly, the four key risks you should be aware of:
- Your money is at risk. As with any investments, investors must understand that their capital is always at risk. The risk is more significant when a loan defaults or delays its interest and capital repayments.
- Does a government-backed scheme cover your money? Many governments will not protect any money you ‘invest’ in peer-to-peer lending. For investors, this means that, unlike traditional banks, if the lending platform collapsed, you are not eligible to receive any compensation.
- Capital does not earn interest until it is invested. Most platforms invest your funds very quickly, but others hold on until a period has elapsed. Investor money is only made once the funds have purchased the loan itself.
- P2P platform scams. It is a sad reality that whenever money is involved, some look to defraud others into handing over their funds which are then stolen by a variety of methods.
How to manage P2P investing risks
Considering the above risks, when deciding to practice P2P investing, there are five strategies P2P investors should consider to manage their risk to their capital.
- Only invest a proportion of your investment allowance. Never invest what you cannot afford to be without. Traditionally, most hardened investors fund no more than 25-30% of their total investment portfolio into P2P investing.
- Be realistic. Understand the higher the rate of return, the higher the level of risk. If the return looks enticing, then expect that there is an element of risk to your money.
- Diversify your loan portfolio. Diversifying your investment portfolio amongst your alternative investment options is very wise. For example, Monestro is unique in that we don’t permit investing in individual loans per se but a group of loans. Investors should also diversify these loan groups as well.
- Loan selection. The loan types you are investing in (consumer, corporate or the use of Loan Originators). The latter means you have more of a chance to get some (or all) of your money back should the loan go bad.
- Select your platform carefully. With hundreds of P2P investing platforms across the US, UK and EEA, you must choose your one with caution.
- How much P2P investing experience does the platform have behind it? Will they avoid bad loans and only select good ones?
- How transparent is the platform?
- What about customer reviews in places like TrustPilot or MoneyCheck?
- What government licences do they have?
Why Monestro P2P loans are more secure
We at Monestro recognise there are risks in P2P investing.
So, to make our loans more secure than the competitors, we have built-in these 7 secure features within our platform so that our investors can invest in confidence.
Skin in the game
All Loan Originators that place loans on the Monestro Marketplace must keep a certain percentage of each loan on their balance sheet.
Skin in the game refers to how much of their own funds the Loan Originator retains in each loan. For instance, if a Loan Originator with 10% Skin in the game issues a €5,000 loan to a borrower and then puts this loan on the Monestro Marketplace, only €4,500 of this loan will be open for investors.
The Loan Originator will keep €500 on their balance sheet. Skin in the game ensures that the Loan Originator interests are closely aligned with the investor’s interests – both sides have a stake in the loan, not defaulting.
To protect investors from borrower defaults, all lending companies on the Monestro Marketplace offer a Buyback Obligation.
The Buyback Obligation is when a loan is delayed for more than 60 days, the Loan Originator will repurchase the investment for the principal nominal value and accrued interest.
It is valid as long as the Loan Originator is in business. Most of the loans continue to accrue interest during the late period, depending on the Loan Originator.
The Buyback Obligation is automatically triggered – investors do not need to act on this.
In general, loans with a Buyback Obligation will have a lower interest rate than loans without it.
The lower rate is offered because the Loan Originator keeps the borrower’s default risk on their side. To compensate for this risk, the LO takes a higher proportion of the borrower’s interest.
Thus, lower interest rate, but less risk to your capital too.
Guarantee funds provide an extra safety net for investors.
It is set in the Agreement between the Loan Originator and Monestro where the LO promises to repurchase an investment from an investor if the promised Buyback Obligation repayments are not received.
If the Guarantor is an Intermediary for an investment vehicle, the Guarantor must set up a Guarantee Fund to collect payments regularly (e.g. 1%).
The LO shall make compensation payments from the Guarantee Fund to the investor when the Guarantees conditions have been fulfilled.
The Guarantee Fund is used to repay investors in the event of a loan default.
Loan Originator risk assessment
Our risk team carefully assesses each Loan Originator before they join the Monestro Marketplace.
Before beginning the cooperation, the team performs a Due Diligence procedure for each prospective Loan Originator. These include (but are not exhaustive):
- analysis of financial statements
- management quality
- underwriting policy
- credit scoring
- loan portfolio performance
- data accuracy
Monestro ensures that the Loan Originator complies with the strict risk standards set for the Monestro Marketplace.
After the partnership launch between the LO and ourselves, Monestro continues to monitor the Loan Originator for risks on an ongoing basis.
Expected income can be forecast based on each individual loan interest, payment schedule and the amount you would like to invest.
To minimise possible loan defaults – investors need to keep in mind the borrower APR. Typically, higher interest rates are connected with higher risks to their capital.
However, if investors wish to receive their funds back faster than the loan amortisation period, they can sell their Secondary Market investment.
The Secondary Market allows investors to add a premium or discount to their investment.
Should an investor buy a secondary market loan, they begin to earn interest on the loan from the date they purchased it.
Note though, as interest is accrued daily, the original investor will be still eligible for all interest that had accrued before the loan was sold on the Secondary Market.
The classic risk management expression “don’t put all of your eggs into one basket?’ remains pivotal to P2P investing.
Diversification is the most crucial element of attaining investor long-term financial goals whilst minimising risk.
On the Monestro Marketplace, investors are offered opportunities to diversify by investing in fractions of loans across different borrowers, originators, loan types and geographies – even starting from €10 per investment.
What’s more, if investors input their desired diversification parameters into our AutoInvest tool, the platform will make the smart investment for you!
Auto Invest is a tool that allows investors to create an investment portfolio based on custom sets of criteria:
- loan term
- loan type
- interest rate
- investment amount
- the Loan Originator themselves
After setting up your Auto Invest criteria, the platform automatically filters according to investor criteria and invests in loans meeting those instructions.
Auto Invest allows investors to save time and ensures efficient allocation of their funds. Investors can edit, pause or resume auto investing at any time.
Furthermore, investors can continue to invest both manually and automatically.
Make your P2P investing as secure as possible
If you are looking for risk-free investment opportunities, you should prepare yourself to be disappointed. There is no such thing as risk-free investments, however wonderful it sounds.
Although investing is never 100%, risk-free should not discourage investors from searching for alternative investment opportunities provided; they are wary of varying risk degrees.
Provided investors learn to understand and manage peer-to-peer investing and use a platform with built-in features that make P2P loans more secure; they can realise their returns with less volatility.