Some risk is normal and should be accepted with all kinds of investing, whether it’s the stocks market or Mintos. Before you invest, familiarize yourself with the associated risks. Remember risk tolerance is individual – only you can decide what you’re comfortable with. To minimize risk, investors can diversify their investments across different loan types, borrowers, geographies, and lending companies.
1. Credit default risk
There is a possibility that the borrower will not make scheduled payments. As a result, you might lose part or all of the investment. The potential loss would depend on the type of loan. In the case of a secured loan, such as a mortgage or car loan, the repayment of the loan would be made by first realizing the collateral, and second by trying to recover the outstanding amount from the borrower. This should result in a lower loss of funds, if any. In the case of an unsecured loan, the repayment will depend on the successful recovery of the outstanding amount from the borrower, which might result in a higher loss compared to the secured loan.
The credit risk of the borrower can be minimized by investing in loans with a buyback obligation. In this case, the lending company has to buy back the loan if it is more than 60 days late, and pay investors the outstanding principal and accrued interest. Investors may still be faced with the possibility of default by the loan originator, which may not be able to honor its obligation.
2. Cash flow timing risk
All payments from an investment in a loan are directly linked to the actual payments done by the borrower. There may be situations in which the borrower makes a payment after the scheduled payment date; as a result, you may receive cash flows later than expected. Depending on the clauses of the loan agreement and circumstances, investors may be compensated for late payments with late payment fees.
3. Reinvestment risk
You might experience lower returns if you are not able to reinvest your money at the same rate, or if you have uninvested money in their account. This can occur when a borrower or lending company repays the loan early.
4. Alignment risk
There’s a risk that the best interests of the lending company and the investor are not aligned and the lending company might be tempted to place substandard loans on the platform. The alignment risk can materialize in the form of the credit default risk or cash flow timing risk.
On Mintos, lending companies initially fund loans out of their own budget, and are required to keep a part of each loan in their books.
5. Lending company default risk
You might experience losses if the lending company issuing a loan goes out of business or experiences problems. In this case, loans financed by the investors might not get serviced and/or repayments made by borrowers might not be channeled to the investors. In this case, the buyback obligation is also at risk.
6. Platform risk
You might experience losses if Mintos goes out of business.
7. Regulatory and compliance risk
Changes in legislation might affect the business model of a lending company or Mintos. The regulatory and compliance risk can materialize in a number of ways, in the worst case scenario for the investor as a form of the lending company default risk and or platform risk.
8. Currency risk
When you invest in a loan, you buy an asset in the indicated currency, and all repayments are made in the same currency. If you invest in a loan denominated in a forgein currency, your return on the investment is impacted by the fluctuations in the exchange rate when you convert it back to your home currency. If the currency of the investment depreciates significantly against your home currency, you could lose part of the investment.
9. Market risk
Market risk is the possibility that you might experience losses due to events that affect the overall performance of investments in financial markets. Sources of market risk include recessions, financial crisis, exchange rate changes, natural disasters, or geopolitical events. Market risk, also known as systemic risk, tends to affect the entire market and can’t be eliminated through diversification. This risk can materialize in a number of ways, in the worst case scenario for the investor as a form of credit default risk or platform risk.