There are hundreds of strange words that are thrown around in Peer-to-peer space. I believe every P2P investor should know about words that are most often used.
So here is P2P glossary, a short review of most often used words in P2P.
But first …
Why Should You Be Familiar With P2P Glossary?
Here is the deal:
People who want to come into P2P universe are often confused about new words, like auto-invest, grace period, skin in the game, etc.
So you are probably wondering: “Which ones are the basic, most-often used words I should know about?
Well, let me make this easy for you – here they are.
Auto-invest – option setting on most P2P platforms, where you specify what type of loans you want to invest in (interest rates, loan originators, loan term, etc.) and it will invest automatically. This means you don’t have to manually check the P2P platform every day and manually buy loans.
Bad debt – debt that won’t get repaid.
Buyback guarantee – it’s basically loan originator saying: “if no payments will be done by the borrower for X days, we will buy that loan back from you. So you get your invested money back and we will deal with the borrower ourselves.”
Cash drag – your uninvested cash that sits on the P2P platform and is not invested into loans.
Collateral – asset, that acts as a security for the loan. Think mortgage – if you buy the house and can’t pay off your loan to the bank, they will take your collateral, that is, your house.
Currency risk – if you invest in loans of different currency than what you invested. For example, if you use Euros, but the loan is in Pesos or Dollars or any other currency. Depending on the exchange rate, you may lose or gain your returns.
Grace period – the time between a missed payment and loan being deemed as default. A longer grace period means worse returns for you. So far, the grace period is only seen on the P2P platform Mintos.
Loan originator – company that acts as a middle man between lenders (me and you) and borrowers.
Secondary market – option on the P2P platform for investors to sell their investment loans to other investors.
Skin in the game – what percentage of the loan amount is owned by the loan originator. A higher percentage means more safe investment because the loan originator has to be more certain in loan stability.
XIRR = formula to calculate your returns. Most P2P platforms show it incorrectly because they want to show it better than it really is. Check here to learn how to use it.