Update on peer-to-peer lending sites - buyback guarantee and secondary market

Question

I read several questions about peer-to-peer lending that were asked something like 5 years ago. I just started investing in two sites (A and B from Riga, Latvia). Apparently p2p investing today 2015/16 has changed a bit. Moreover it is interestint to see that Baltic countries (Estonia, Latvia) enter the market (for example by subsidiaries of Scandinavian banks):

• A offers protected loans. Meaning that if loans are overdue for (approx) 30 days they repay the loan and interest to the lender.
• maturities are relatively short, starting with 1 month at A but also B has shorter and longer terms.
• B has a lot of loans in the secondary market where loans are sold at par or premium mostly and sometimes with discount.

So my questions are:

• How can a p2p site offer protection in the above sense? Do they put the loan back to the originator?
• Having read other questions here I see that the liquidity was an issue 5 years back. These days with horizons of only a couple of months this seems not to be a problem anymore. What do you think about this development?
• These days I only see loans in the secondary market at premium or with the same YTM as freshly issued loans. Given the fact that the site takes a 1% charge for secondary market trades - does it make any sense to invest there?

I hope this question serves as an update on the topic.

Answer 1

All lenders make money from loans, despite the fact that there will be some defaults, they just have to make enough money from those that don't default to offset the losses from those that do, so that their over all profit is good enough to be justified, so there's no reason the p2p lending companies can't protect your loan. If you remove the risk of losing your investment you can expect your return to be reduced though, as they have to take more profit away from you in order to fund the pool used to pay out when there is a default. This doesn't necessarily mean your money is completely safe though, if the p2p lender itself went bust you would probably still lose your money, unless it was appropriately insured.

I'm not sure liquidity is really the right word really, liquidity is about encashment without serious penalty. If you can transfer the debt to someone else at any time then liquidity is good, but if you don't really have that option (as most lenders don't) then your investment amount (whatever isn't paid back yet) is completely illiquid still, just for a shorter time. I don't see how the term is important myself, there are many investments that have differing maturity time scales, and you just have to pick one that has a suitable time scale, return and risk for you.

1% charge or not, there is still an ultimate net return on investment, secondary market or not. Virtually any investment has costs of some sort, you just have to take them into account and make sure you don't get fooled into thinking the ROI is better than it seems because of the way they've packaged and presented it.