A Buyback Guarantee is the guarantee that your P2P investment into a loan will be bought back by the platform or the underlying loan provider.
When investing in P2P credit, there’s a relatively high risk of the borrower defaulting on the loan. Many of the borrowers have been rejected by banks in the first place, and the interest rates are much higher.
As a P2P investor, you usually mitigate the default problem through diversification. Instead of investing 1000 dollars into one loan you invest 10 USD in a 100 different loans with various risk profiles. With an average interest rate of 20% you still end up with a great rate of return if 10% of your loans default.
There’s another way to handle this. Some platforms offer a buyback guarantee. In practice this means that the platform will buy back the loan from you in exchange for a lower interest rate. So if the borrower doesn’t manage to pay the loan repayments in time the platform will take back your investment and you don’t have any risk.
Here’s what Mintos writes about buyback guarantees:
A buyback guarantee is a guarantee issued by the loan originator to the investor for a particular loan, that confirms the loan originator will repurchase the loan from the investor if that particular loan is delayed by more than 60 days. The buyback guarantee is given at an individual loan level … If a loan with a buyback guarantee is delayed by more than 60 days, the loan is automatically bought back by the loan originator from the investor at the nominal value of outstanding principal, plus accrued interest income.
The P2P platform Twino offers a variation on this, a payment guarantee.
Kasper is our expert for saving, investing and bank accounts. Kasper holds an MSc in Mathematics and worked with Mercedes-Benz and the Dutch tax authorities.