At Mintos, we take investor protection very seriously. Our risk mitigation policy includes several layers to help protect investors from missed loan repayments and defaults. Let's take a look at each of these!
Loan originator risk management
There is a large variety of loan originators on the Mintos marketplace. Each loan originator is carefully assessed by our risk team prior to joining the marketplace. Before beginning cooperation, we execute a due diligence procedure for each prospective loan originator. We perform thorough analysis of financial statements, management quality, underwriting policy, credit scoring, loan portfolio performance, and data accuracy to ensure that the loan originator complies with the strict risk standards we have set for the Mintos marketplace. After the launch of the partnership, we continue monitoring the loan originator for risks on an ongoing basis.
Loan underwriting policies
On an individual loan level, loan originators issue loans in accordance with their own established underwriting and credit scoring policies. These include not only the industry standard processes, but also series of advanced checks - identity, credit, affordability, and fraud - to ensure borrowers are creditworthy.
The exact underwriting policy undertaken by each company may differ, but the main principles are the same:
- We only partner with companies that have developed consistent scoring models for borrower evaluation when issuing loans and use data validation with third-party data sources, such as credit bureaus, when possible;
- For mortgage and car loans, borrowers provide collateral that can be used to recover the loan in the case of default, thereby lowering the risk of capital loss;
- For business loans, other credit enhancements are obtained, such as a personal guarantee (a legal commitment from a business owner to repay the loan from personal means if the business fails to perform on loan repayment).
In the process of evaluating loan originators, we look not only at the formal policies, but also at their implementation, making sure that it also lives up to our rigorous standards.
Skin in the game
All loan originators that place loans on the Mintos marketplace are required to keep a certain percentage of each loan on their balance sheet. Skin in the game refers to how much of their own funds the loan originator retains in each loan. For example, if a loan originator with 10% skin in the game issues a EUR 1000 loan to a borrower and then places this loan on the Mintos marketplace, only EUR 900 of this loan will be available for investors to invest in; the loan originator will keep EUR 100 on their balance sheet. Skin in the game ensures that the interests of the loan originator are closely aligned with the interests of investors - both sides have a stake in the loan.
To protect investors from borrower defaults, many lending companies on the Mintos marketplace offer a buyback guarantee. The buyback guarantee means that if the loan is delayed by more than 60 days, the lending company will repurchase the investment for the nominal value of the principal and accrued interest. It is valid as long as the lending company is in business. Most of the loans continue to accrue interest during the late period, depending on the lending company. You can read more about this in the lending company details in the Interest income on delayed payments column. Buyback happens automatically and with no additional effort required from the investors' side. On the marketplace, loans with a buyback guarantee are marked with .
In general, loans with a buyback guarantee come with a lower interest rate than loans without it - the difference is the approximate estimated annualized bad debt rate. Loan originators charge borrowers higher interest rates than the rate they offer to investors on the Mintos marketplace. The difference covers administrative and marketing cost, as well as constitutes the profit margin of the loan originator. By offering a buyback guarantee, the loan originator keeps the borrower's default risk on its side. To compensate for this risk, the loan originator takes a higher share of the interest paid by the borrower. In other words, the loan originator manages the buyback guarantee from the interest rate spread between the interest rate they charge to borrowers and the interest rate they pass to investors.
Broad diversification opportunities
Have you ever heard of the classic risk management expression “don't put all of your eggs into one basket'? Diversification is the most important component of reaching long-term financial goals while minimizing risk. On the Mintos marketplace, investors can diversify easier than ever. Our marketplace offers opportunities to diversify by investing in fractions of loans across different borrowers, originators, loan types, and geographies - starting from EUR 10 per investment. What's more, if investors input their desired diversification parameters into our Auto Invest tool, it happens automatically!
All of these factors together go a long way to protect investors and make the Mintos marketplace a great place for easy, transparent, and diversified investment experience. As with all forms of investment, when investing in loans through the Mintos marketplace, your capital is at risk. But we do our best to make sure this risk is as low as possible.