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.
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%.
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.
Investor must consider that all investment activities include a risk of partial or total loss of capital. Investing in consumer and business loans do not make an exception. Investment risk is a variation of the received returns 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 and that Fellow Finance stops providing the service (market 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. This means that 1% of the total investment capital should be invested in one loan application within one loan market. 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 is 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. Companies are classified in a similar manner as consumers with the addition that business loans may contain collaterals.
In certain peer-to-peer loans the credit risk has been limited by selling the unpaid loans to credit agengies. The selling prices vary with different markets and you can find the present levels of the prices of each market 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 credit risk.
The interest rate risk of the loans is related to borrower paying back his loan in advance which leads the investor losing the future interest receivables from the rest of the loan period. On the other hand, the investor has only made a profit on the loan and can automatically re-invest the loan capital back to another loan. All the loans have fixed interest rates which protects investor from the market fluctuation.
The liquidity risk has been reduced by the secondary market enabling investors to liquidate their loan portfolios by selling loans to other investors.
The risk emerges when a borrower is living in a different currency zone because the exchange rate may change during the loan period.
Investor has always a risk that the service offer stops providing the service partially or fully. To manage this risk the loan contracts are binding between investor and borrower so investor can demand the payback of the loans according to the contracts. Fellow Finance is financially stable company regulated by the Financial Supervisory Authority of Finland.
If you want more information you can also check our investor guidebook which has answers to most frequently asked questions.
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