What are loan platforms
Lending platforms allow many investors to co-own a single loan issued to an individual or company. On the other hand, for borrowers, the platforms provide an alternative source of financing, which can be especially useful in situations where bank financing is not suitable or available for them. The platform ensures the offering of these loans to investors, as well as administers settlements between the borrower and the lenders or investors. There are two types of lending platforms, each with a slightly different operating principle and also different regulation from the financial industry supervisors.Crowdfunding platforms
A classic peer-to-peer lending platform evaluates, standardizes and publishes information about a potential borrower to investors, while investors vote with their money on whether to invest in that loan or not. If the necessary financing from investors (or the crowd) is collected, the loan is financed. Next, the platform ensures the issuance of the loan, as well as follows up on the receipt of payments and distribution to investors. The platform, according to its procedures, takes care of the protection of investors' interests, including, if necessary, providing loan recovery work. Bondora (loans for private individuals), Capitalia (loans for companies) and Estateguru (loans for real estate financiers) operate according to this principle in the Baltic States. In the European Union, a new and unified regulation will enter into force for all crowdfunding platforms from the fall of 2023, ensuring that their operation meets certain standards and requirements.Broker platforms
Broker loan platforms sell loans previously issued by other financial companies to investors, indicating relatively little information about the recipient of the loan itself, but offering to buy back the loan in case of default. For the most part, brokerage platforms sell loans issued by so-called sms-lenders in different geographies of the world. Some of these platforms (such as Mintos) aggregate loans from many different lenders, but most sell loans from related companies (such as Twino). The peculiarity of brokerage platforms is that the investor only indirectly finances a specific borrower, individual or company. Due to the loan repurchase rule, investors are essentially financing (giving out a loan to) the very financial company that issues these loans. Therefore, in order to be sure of the risk of the investment, the investor must evaluate not the borrower himself, but the company that gives a guarantee for the redemption of the loan. To some extent, investing in brokerage platforms is similar to buying bonds of lenders. According to this principle, brokerage platforms are also regulated by the state - as traders of financial instruments (bonds).Historical performance of platforms
Since loan platforms mainly issue loans to companies and individuals who cannot get financing from a bank for various reasons, these loans are more risky. This additional risk should also be justified in the additional return that the investor can expect from such investments. In recent years, historical average interest rates offered to investors on Baltic loan platforms have been between 10 and 15%. However, the return of the final investors depends on how big are the losses due to bad or doubtful loans. Unfortunately, these statistics are often calculated differently for each platform and are difficult to compare, and the loan platforms lack data for a sufficiently long period for a full analysis. However, as the following table indicates, at least in terms of immediate returns, lending platforms outperform high-risk bonds and are comparable to the long-term average return of stock investments. This is, of course, if the investor has chosen a reliable platform and invests diversifiedly on this platform.Annual return on investment over different time periods
2 Baltic Benchmark index for the period ending in March 2023
3 SPDR Barclays High Yield Bond ETF for the period ending April 2023
4 Data for the period 2008-2022
Accordingly, lending platforms can serve as a good addition to an investor's overall investment portfolio. However, in order to avoid losses, it is important to carefully choose an investment platform and always remember the need for diversification. We have collected thoughts on how to compare some platforms and choose the most suitable for you in a separate article.