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Interest rates on Mintos have shown a strong upward trend over the last weeks. As of April 14, more than 32% of the loans available on the Primary Market have rates of 15% or more. As both average and top rates are rising, we received questions from investors who were curious about the dynamics. Investors want to know how these rates are possible, and whether they are sustainable for the lending companies.
We see 2 main factors at play here.
1. It’s an investor market
We’ve seen in the past that interest rates fluctuate with supply and demand. In recent weeks, the reduced investor demand for loans has affected the dynamics of the market: Loan supply outpaced investor demand, and as a result, more loans are available for investment. As less investing is happening, lending companies are competing for investors by offering higher interest rates.
2. For lending companies, interest paid is just one expense
For the lending companies, interest paid to investors is only a small part of their expenses. Across the board, we’re seeing that lending companies are willing to optimize their cost base, reduce their profit margin, cut other expenses, and expand their portfolio with high-quality borrowers. This gives them the space to pay higher interest in a way that is sustainable for them to compete for liquidity.
As Mintos CEO Martins Sulte said in a webinar with investors:
“For those who are well capitalised and have liquidity, downturns are golden times as they can grab the market share by getting customers for cheaper prices, and from there, they can build a strong business. Many lending companies were born in 2008 and 2009, when they were able to build up their client base and issue loans at reasonable cost.”
At the end of the day, it all boils down to how well a lending company adapts its business model to changes in the market, and how much cash reserves it has. We’re keeping a close eye on the lending companies, and check if their business model allows such rates.