AutoInvest (function to invest automatically): Key investment mode for many platforms that allows us to predefine a number of parameters of the loans or projects (term, interest rate, amount to invest, origin …) so that the system will invest for us, following our criteria and indefinitely, so that our intervention is no longer needed to continue generating benefits.
Welcome Bonus: Some platforms offer welcome promotions for new customers to encourage new subscriptions. They tend to be either cash bonus or additional returns for a predefined period. The blog contains links to these bonuses. If you click on any of my links and you decide to invest, you may receive a small bonus and I will earn a commission. It is a situation where everyone wins. You can access a table with all the update promotions and links here.
Buyback (buyback guarantee): Buyback loans come with the commitment (from the originator or platform) to pay the investor the capital invested (and often also the interest) in case of defaults or delays. The Buyback is activated if, after a period of time, the borrower has not made the repayment of the loan and there is therefore a delay. This period depends on the platform, originator or loan characteristics, but it is usually 30 or 60 days (just 3 in the case of Fast Invest). It is important to note that the Buyback or Repurchase Guarantee does not imply an absolute protection of the investment in the case of bankruptcy of the originator. In general, platforms that do not offer Buyback usually compensate for this either with a higher gross return (which may result in a higher net return even if there are defaults) or by offering some other type of guarantee or collateral (such as mortgage loans).
Cash Drag: It is defined as the money that remains without investing in a platform because of the lack of loans or projects, without offering any performance and causing a decrease in profitability. It is a problem that arises from time to time on some platforms, usually temporarily, for a few days or maybe weeks. Often it is not a total lack of supply, but it only affects loans of certain characteristics (above a certain profitability or term). In Cash Drag cases there are three possible solutions: 1) wait for the offer to increase; 2) modify the parameters of your AutoInvest to made them less strict, or increase the amount invested by loan; or 3) transfer the unused funds to another platform.
Crowdfunding: In a nutshell, it is the financial support for a project provided collectively by a network of people (mostly via internet) that is an alternative to traditional methods of bank loans. You buy a share in a property (or company), which makes us owners of that property (or dividends and company assets).
Crowdlending (or crowdfunding of loans): It is a form of investment in which a group of people lend money to individuals or companies in exchange for an interest, usually through a platform.
Crowdlending to Companies / Peer to Business (P2B) Loans: Within crowdlending, there are platforms that specialize in lending to companies, typically SMEs, allowing users to buy shares. A company applying for a loan obtains financing from multiple lenders that invest in fractions of that loan through a crowdlending platform.
Crowdlending between individuals / Peer to Peer Loans (P2P): They are financing transactions from one individual lender to an individual borrower, i.e. peer to peer, without any financial institution involved. An individual applying for a loan obtains financing from multiple lenders that invest in fractions of that loan through a crowdlending platform.
LTV (Loan To Value): Expressed as a percentage (%), the LTV is a value used in home equity loans that gives us an idea of the amount of the loan requested compared to the value of the property submitted as security or collateral. The lower the better, so that in case of default, one can easily recover the money invested.
Loan Marketplace: These platforms act as aggregators of loans, i.e. bringing together the loans issued by various originators (issuers of loans). These platforms are very useful in terms of diversification, because it gives access to various originators using a single platform. Mintos is the best known example.
Primary market: The primary market is a platform where we purchase loans directly from the platform or originator.
Secondary market: The secondary market is the place to trade loans between users of the platform. It is very necessary on platforms that offer long-term loans. The secondary market offers two major advantages: 1) provides a mechanism to quickly sell our shares in case we need the money, increasing the liquidity of the platform; and 2) to find good investment opportunities, often better than the primary market. Some platforms offer the option to repurchase your shares, sometimes applying some sort of penalty or extra cost.
Microlending: Personal loans, usually of a low amount (less than 1,000 EUR) that are granted with a very short maturity (30 days and sometimes even less). These products are characterized by a high profitability, but also high risk, because of their higher default rates.
Originator (Loan Originator): They are the issuing entities of loans. Marketplaces typically offer loans from various originators. Originators are ultimately responsible to meet the repurchase guarantee (Buyback) in case of delays or defaults. It is recommended to diversify our investment among several originators.
Default rate / Delinquency Rate: Defined as the ratio between the value of doubtful loans and the value of the total loan portfolio. On platforms where 100% of loans come with Buyback, the percentage of defaults is 0%. Often platforms with loans/projects of various categories/grades (A + to D) provide different default rates for each category. Overall, the better the grade, the fewer the defaults and vice versa.
Mortgage loan: Loan secured by a mortgage guarantee, which, in case of a default of the payment, the lender or investor would become the holders, thus being able to sell the property to recover their money, interest and penalties. These loans usually have less risk than personal or commercial loans.
Internal rate of return (IRR): TIR English. It is the interest rate or yield obtained with a specific platform. That is, the percentage of profit or loss of an investment for amounts that have not been withdrawn from the project. It takes into account cash flow (which is not necessarily periodic), reinvested of interest earned, commissions, defaults, late payments … and bonuses. To these profits, one must deduct taxes.