Peer to Peer lending in Latvia: Mintos vs Twino

Problem: bank deposit rates is a joke

Let’s say that you have 1000 EUR in your account and would like to invest it. Guess how much you would earn from fixed term deposit? 0.1% per year. So by “freezing” your 1000 EUR for 1 year you would earn 1 EUR.

Screenshot 2015-11-29 19.52.54

And guess how much is the penalty if for some reason you would need to get your money back after 6 months? 1% of the deposit amount. So is it worth to use bank deposits to get 0.1% per year with risk loosing 1% if you want to get back deposit sooner? I don’t think so.

Interest rates used in this example are taken from Swedbank, but they are similar in other banks as well.

Peer to Peer lending

To get higher interest rates, one alternative for investors could be a Peer to Peer lending platform such as:

But up to this point I had not invested in P2P lending platforms for several reasons:

  1. Each P2P lending platform has their own loan rating system, they can change it anytime and make “bad” loans look “good”. In short term they might actually be motivated to do that – to get more investments.
  2. If loan term is several years and you want to get your money back sooner – you might need to sell your investment with discount to someone else in the secondary market, and that can eat away your gains.
  3. Some of the loans will be late or unpaid, and you will loose money on them, and need other loans to give you good enough returns to compensate for this.

So in short – I had trouble trusting a platform that makes money on all deals, but lets investors take on all the risk.

Solution: Buyback guarantee

Recently Mintos.com and Twino.eu have “solved” these issues for me as a potential investor by providing “Buyback Guarantee” – so if you have invested in a loan that is given out to someone who cannot repay it back, then loan provider will buy this loan back from you, including interest.

In theory – you cannot lose money and are guaranteed a 10+% interest rate on your investment.

Mintos

This is how it looks in Mintos platform:

Screenshot 2015-11-29 21.05.36

Note that in Mintos platform this guarantee is given for all Creamfinance and Mogo loans, and for some Capitalia loans (with risk category A), but if I filter out loans that have Buyback Guarantee and whose term is 6 months or less, all results are from Creamfinance – but still there are 736 possible loans, all with 12% interest rate.

Screenshot 2015-11-29 20.57.53

Twino

If I search for loans with max term 6 months and 12+% interest rate, there are 1000+ results, so also no problem with finding loans to invest in.

Comparing to Mintos, Twino provides a bit higher interest rate (12.9% vs 12%), and if you use Auto Invest function or visit website often, you might even find loans with 13% and 14% interest rate.

Screenshot 2015-11-29 21.10.41

Also their buyback guarantee activates sooner – after 30 days (vs 60 days for Mintos), and it works for all their loans, so you don’t need to filter out only those loans that have this buyback guarantee.

Screenshot 2015-11-29 21.15.54

Potential returns

If we compare results from investment in a bank deposit vs P2P platform with a guaranteed buyback, the difference is huge: 1 EUR vs 120 EUR return.

Bank Mintos Twino
Investment €1000.00 €1000.00 €1000.00
Term 1 year 1 year 1 year
Interest rate 0.10% 12% 12.9%
Interest sum €1.02 €120.00 €129.00

And what about stocks? Long term average return rate for stocks is around 10%, but that comes with volatility – one year you could get +20%, another: -20%, and might need to stay “in stocks” for 5+ years.

So getting more than 10% guaranteed return with short term investments is almost unbelievable, and I predict that these rates will go down as more investors grasp this.

Risks

Sounds too good to be true? Well, there is one issue – you can lose 100% of your investment, if the platform gets hacked or company behind a P2P lending platform goes bankrupt.

That would not be the same in case a bank goes bankrupt – then your savings would be safe up to 100 000 EUR because of Deposit Guarantee Fund.

That is also stated in Mintos.lv FAQ:

Are investments through Mintos guaranteed by the State under the Deposit Guarantee Fund of Latvia?

Users conclude transactions in Mintos directly and on their own responsibility. Site users are aware and understand that they can lose some or all of their deposited funds and take full responsibility for occurrence of such losses. Mintos informs that currently site users are not protected by any of the national guarantee schemes in Latvia such as Deposit Guarantee Fund guaranteeing deposits for clients of credit institutions or protection of financial instrument market clients when receiving services from a licensed investment service provider. Prior making investments please read through FAQ, User Agreement and Assignment Agreement.

Suggestions for investors

To decrease risks, here are some ideas:

  1. Don’t invest all your life savings in P2P loans. You can lose your investment.
  2. Diversify just like in stocks, use several P2P platforms.
  3. If possible, invest in loans that have Buy back guarantee.
  4. Prefer loans with shorter terms, so you can get your money back faster.
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