Risk and Return of Lending

We offer our investors fully transparent view on the returns and risks related to investing in loans. Investors are always provided an access to real-time information on interest rates and credit losses of each market and tools for analysing own investments and loan portfolio on personal investor account.

Return of investment

The return of lending is the interest of the capital lent. The interest rate at any given time depends on how many investors are bidding for a loan and at what rate. Investors who are offering the cheapest loan for a borrower will automatically be selected as lenders for the loan. Then, the borrower decides whether to accept or reject the received loan offer. The interest rate level of our service, which is based on supply and demand of money, has provided competitive loan offers for borrowers and steady returns for lenders. Historically the annual return of loan investing has been around 6-9%.

Enjoy compound interest

Monthly interests and repayments can be automatically re-invested in new loans by utilizing our Loan Allocator in order to access the compound interest phenomenon. The compound interest means that not only the original capital will generate interest, but also the received interest itself will start to produce interest. For example, by investing 200€ every month in loans at 10% annual return, capital will increase to over 40 000€ in 10 years, although monthly savings have been only 24 000€. Monthly repayments enable the compound interest to accumulate quickly.

Risks of investing

Investor must consider that all investment activities include a risk of partial or total loss of capital. Investing in loans does not make an exception. Investment risk is a variation of the received return compared to the expected return. The key risks of investing through our marketplace is the payment default of a borrower (credit risk), received return differing from the expected return (interest rate risk), risk related to the time which is needed to sell a loan on the secondary market (liquidity risk), the foreign exchange risk (currency risk) and that Fellow Finance stops providing the service (market risk).

Credit risk

One of the best ways to reduce credit risk is to diversify capital in numerous loans. A good rule of thumb is to acquire a loan portfolio containing at least 100 loans meaning that 1% of the total capital should be invested in a loan application within a loan market. The minimum investment per loan application is 25€ indicating that enough diversification can be acquired even with a small capital. Diversification does not decrease the expected return but reduces volatility.

When a person applies for a peer to peer loan his ability to repay the loan is evaluated carefully. We ensure that a borrower does not have a payment default remark in a payment default register and he should be able to pay the loan back with his disposable income. Creditworthiness is also assessed with a statistical credit scoring model which classifies borrowers into five different credit rating classes. The credit rating reflects the probability of default. See the statistics for the payment behavior of credit classes by loan market.

Extra security for credit risk

In certain peer-to-peer loans, the credit risk has been limited by selling unpaid loans to collection agengies. The selling prices vary with different markets and the current prices of each market can be found by login into the investor service. In addition, Finnish consumers are offered a payment protection insurance for unemployment, long-term sick leave and death which provides an additional security for repayments. Business loans include at least an entrepreneur's own personal guarantee and often a collateral such as real estate or enterprise mortgage to reduce the credit risk.

Interest rate risk

The interest rate risk is related to a premature full repayment where investors lose the potential interest from the rest of the loan period. This risk can be managed by using loan allocators which allow investors to re-invest capital back to new loans automatically. All loans have fixed interest rates which protects investors from market fluctuation.

Liquidity risk

The liquidity risk has been reduced by the secondary marketplace enabling investors to aim liquidate loan portfolios by selling loans to other investors.

Foreign exchange risk

The risk emerges when a borrower is living in a different currency zone than an investor because the exchange rate may change during the loan period.

Market risk

The market risk is that a lending company stops providing its service partially or fully. To manage this risk, all loan contracts are binding between investors and borrowers meaning that investors are entitled to receive invested capital from loans according to the contracts also without Fellow Finance. Fellow Finance is financially stable company regulated by the Financial Supervisory Authority of Finland. See the financial information of Fellow Finance.

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