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 – This is a setting that is available on most P2P platforms. With it, you specify what type of loans you want to invest in (interest rates, loan originators, loan term, etc.). After you set it up, the auto-invest will do just that – automatically invest in new loans. This means you don’t have to check the P2P platform every day and manually buy loans.
Bad debt – debt that won’t get repaid. Basically a loss of capital.
Buyback guarantee – it’s basically loan originator saying: “if no payments will be done by the borrower for X days (usually 15, 30, or 60 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 – cash that sits on the P2P platform and is not invested.
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 a different currency than what you invested, you run into the risk of losing (or gaining) additional money, thanks to the exchange rate.
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 middleman between lenders and borrowers. It borrows money from the lenders (me and you), and lends it to their clients.
Secondary market – option on the P2P platform for investors to sell their investment loans to other investors (or buy from them).
Skin in the game – what percentage of the loan amount is covered by that loan originator. A higher percentage generally means a safer loan, because the loan originator has to be more certain that the client will pay it back.
XIRR = formula to calculate your returns on P2P platforms. 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.