Bondora is very different to for example Mintos. Two things set Bondora apart from the competition
- They issue the loans themselves, and
- They don't have a buyback guarantee (Read my Bondora review on why they shouldn't either)
This should at first alarm you. With this kind of setup, Bondora's intresses aren't exactly aligned with yours, as Bondora will make money even if you don't.
Probably due to the missing buyback guarantee, the secondary market on Bondora isn't as liquid as it is on e.g. Mintos. This means that when you invest on Bondora for a loan, the duration of the loan can be e.g. 3 years.
Also, if that loan gets delayed, it can turn into 4 years or more. Or it can default.
To balance this, Bondora offers much higher interest rates than its competitors, but you carry a lot of risk as an investor. My average interest, weighed by principal, is 49%.
So that must mean that everything goes into default? So far no. in fact, my internal rate of return so far has been over 27%, accounting for defaults so far.
But what happens to loans eventually on Bondora then? Where will my internal rate of return land in the long term?
It's actually quite difficult to get proper information on this. Bondora does have fairly decent public statistics, but it's difficult to understand how realistic a picture they want to paint.
For example, let's say you invest 100€ on a loan on Bondora and the borrower starts to miss payments, Bondora will not mark the whole 100€ as delayed, only the payments that have been missed.
This obviously makes things look quite nice for a while.
What is the total interest for investors who have fully exited the platform? That statistic doesn't exist.
So how can I shed more light to this?
There isn't a great way to export the loans from Bondora. Yes there is.
There is however the Bondora API, which luckily I can use. So what I did was made a small script that fetches all my investments through the API. You can't get all individual transactions, but you do get quite a bit of information, like when the investment was made, its value, status etc.
Analyzing this export sheds a lot of light into how Bondora's loans actually function - much more than their own reports and statistics.
Edit: through a helpful user on twitter @InvertirAhorros, I found the account statement function. I'll add more to this below.
So that must mean that everything goes into default? So far no. in fact, my internal rate of return so far has been over 27%, accounting for defaults so far.
But what happens to loans eventually on Bondora then? Where will my internal rate of return land in the long term?
It's actually quite difficult to get proper information on this. Bondora does have fairly decent public statistics, but it's difficult to understand how realistic a picture they want to paint.
For example, let's say you invest 100€ on a loan on Bondora and the borrower starts to miss payments, Bondora will not mark the whole 100€ as delayed, only the payments that have been missed.
This obviously makes things look quite nice for a while.
What is the total interest for investors who have fully exited the platform? That statistic doesn't exist.
So how can I shed more light to this?
Exporting loan statistics from Bondora
There is however the Bondora API, which luckily I can use. So what I did was made a small script that fetches all my investments through the API. You can't get all individual transactions, but you do get quite a bit of information, like when the investment was made, its value, status etc.
Analyzing this export sheds a lot of light into how Bondora's loans actually function - much more than their own reports and statistics.
Edit: through a helpful user on twitter @InvertirAhorros, I found the account statement function. I'll add more to this below.
My Bondora portfolio stats in February 2020
The last time I invested heavily into Bondora was a year ago, in February of 2019. Most of my loans are in Finland, only some in Spain and a bit more in Estonia.
Most of my investments are in the F-rating loans in Finland. And at this point you go "Nooo F-rating means huge defaults your profits are ruined!"
Just hold your horses for a moment.
Surprisingly, F-rating is performing better than e.g. E-rating. I had a hunch about this looking at Bondora's public statistics, where F-rating loans are paying much more interest than E, yet less is delayed.
The following charts are cumulative in the sense that e.g. Qtr 1 2018 covers everything from Qtr 3 2017 up to Qtr 1 2018. This way the calculations get more volume behind them. On the other hand, the closer to the end we go, the less time the loans will have had time to get delayed or default.
It seems that E-rated loans are systematically more delayed than F-rated. If you look at the row two years back (Qtr 1 2018), that will have given the loans at least 24 months to delay and default. Interestingly, F-rating is doing quite well actually, best in class in terms of share of delayed principal.
The second chart is even more interesting: the share of defaulted principal. F-rated loans are just as defaulted as D or E. C rating is doing better.
Here's another chart that illustrates what's going on more visually. The lines should grow leftwards, meaning the more time a loan has been running, the more likely it is to be delayed or defaulted. Interestingly the line describing the share of delayed loans is declining towards the history (left).
The yellow line is amount of principal delayed of the principal that is remaining.
The red line is amount of principal delayed of the total principal invested.
Both lines are cumulative, until that month or earlier.
In a way the yellow line going down could mean borrowers taking control of their finances through time, but who knows.
The red line does grow towards the past, quite linearly actually. Let's look at that a bit closer, aggregated by quarter.
With a simple regression it would seem that default rates grow between one to two percentage points annually. My average loans are four year loans, but in truth, my loans aren't usually paid on time.
I was able to find the account statement function from Bondora, which helps me to look at loans individually and over time! I wanted to check how quickly the principal is being paid back and it is surprisingly stable. Here, have a look.
I was able to find the account statement function from Bondora, which helps me to look at loans individually and over time! I wanted to check how quickly the principal is being paid back and it is surprisingly stable. Here, have a look.
All of the loan vintages (Year-quarter) are behaving very similarly. If we look at the ones that have gotten furthest, the one with a bit more volume behind it is 2018Q1. 34% of loan principal from that vintage is delayed and 3% is defaulted. 31% of the principal has been paid back in 26 months, which is about 14% annually.
Taking these assumptions:
- The loans extend to 8 years since they get delayed
- 1.5% of original principal defaults every year, amounting to 12% over 8 years
- 11% of the original investment returns every year for 8 years, amounting to 88% (12% defaulted)
- Although interest originally was 49%, we'll only use 15% as actual interest (which would mean over two thirds of the interest is lost due to loan re-negotiations etc.). Principal that is repaid or defaulted doesn't pay interest (of course).
But is 15% interest correct? My portfolio has yielded 27% in internal rate of return so far. Going down to 15% does not look very likely to happen soon, unless bigger defaults start rolling in. Here's the picture of my internal rate of return again for convenience.
How likely is this scenario?
I don't know, but I feel it's a realistic or even a bit conservative scenario. And the stats seem to support it, so far. The problem is that if indeed it takes e.g. six years to pay the loans back, even after two years it's too early to be anywhere close to sure.
If this is how it plays out, then most of the interest is actually lost due to re-negotiating loans, not due to defaults. This makes sense, as it's a fairly big impact to your life if you lose your credit: you can't rent an apartment, can't get a credit card, can't even buy anything in installments.
In countries such as Finland, where most of my loans are, you can re-negotiate your loans unilaterally, which in effect drastically lowers the interest rate. Unfortunately, since Bondora doesn't provide all transaction data through the API, I can't study the internal rate of return at loan-detail, only at portfolio level. That blurs the picture quite a bit.
The big uncertainties are:
- Do defaults really follow a linear pattern?
- Will long-term interest stay around 15%?
The reason I don't believe defaults would pick up more than linearly is that the share of delayed is steady, or even declines towards the past.
It is hard to say what long-term interests will be like, but it is definitely possible they will drop below 15%. If they do, will the high interest of the younger portfolio be able to cover for the winding down of interest payments? 🤷
I'm going to wait and see, but it will take a few years still. Feel free to stick with me!
Pros and cons
What makes Bondora interesting is that you don't have middlemen in lending. You don't have a loan originator that can go bust. You carry the risk yourself. You are the loan originator.
The tricky bit is though that you rely on Bondora for everything: Who's a good borrower and who's not, collecting bad debt, filing court orders and so on. Bondora promises to do all that, while you finance it and hope for the best.
So far, still after one year since I stopped the auto-invest the internal return rate is 28% - on a small decline though for sure. But it is early days.
What will the internal rate of return look like one year from now? How much will it have fallen? What will be the 3-year default rate? Tough to say.
And what if I need the money earlier? The secondary market is not a real option - it's too illiquid. Also, turning the portfolio to Go & Grow doesn't work once loans get delayed.
If you're considering investing on Bondora then know that there are those who would never consider the platform due to it not having a buyback guarantee. Also, it's a much longer commitment than most other platforms, not only since loans have long durations, but also since they will get delayed and re-negotiated.
Should you invest on Bondora?
That's for you to decide yourself. There's definitely great uncertainty with Bondora and huge liquidity risk.
If you'd like to dig into my loan book of 5000+ loans, shoot me an email at thewealthyfinn@gmail.com.
I would personally invest again in Bondora, but I'd balance it better with the rest of my portfolio. My Bondora portfolio was a quarter of my p2p portfolio at its highest and while it so far seems to be doing well, I would prefer it being a smaller share - just in case things don't go as smoothly all the way.
So far though, I don't have reasons to think they won't. 🤞 fingers crossed all goes well!
If you do decide to invest on Bondora, please use my referral link to register and you'll get 5€ on your account to invest.
Also, if you'd like to read more on Bondora, go ahead and read my Bondora review. It's got a little more about what kind of a platform it is.
