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Investing in Micro-Loans (Payday Loans)

Jul 21, 2024

Investing in Micro-Loans (Payday Loans)

Introduction

  • Presenter: Jakub from P2P Empire
  • Topic: Investing in micro-loans, particularly payday loans
  • Audience: P2P investors
  • Objective: To provide a deeper understanding of payday loans to help investors make more informed decisions

What are Payday Loans?

  • Definition: Short-term, unsecured consumer loans (also known as microloans).
  • Loan Term: Around 30 days
  • Loan Amount: Typically between €100 and €1,000
  • Interest Rates: Ranges from 40% to 3500% annually
  • Collateral: None (Unsecured loan)
  • Default Consequences: Additional fees, debt collection, negative impact on credit score
  • Eligibility: Must have a positive creditworthiness, be over 18 (19 in some countries like Poland), provide income reports, and have no negative entries in national debt collector registries.

Borrowers' Reasons for Taking Payday Loans

  • Primary Reasons: Cover unexpected expenses, house renovations, car payments
  • Other Reasons: General purchases, medical expenses, gifts, bills, education expenses
  • Market Variations: In Asia, reasons include education and medical expenses, household appliances, electronics, and business expenses.

Payday Loan Market Dynamics

  • Target Demographic: Underbanked borrowers who can't get loans from banks
  • Regulation: Varies significantly between markets. Disclosure of APR is required in some jurisdictions but not all.

Default Rates and APR

  • Default Rates: Data from Robocash shows variation by market e.g., 8% default rates in Russia and Kazakhstan
  • Annualizing Default Rates: Multiplying short-term default rate by the number of such periods in a year.
  • APR (Annual Percentage Rate): Represents the actual yearly cost of funds including any additional fees.
  • Effective APR: Accounts for all fees, can be tracked on platforms like Mintos.

Operational Costs of Payday Loan Providers

  • Defaults: Losses from non-paying borrowers
  • Operational Costs: Legal expenses, IT system development, recruitment, payroll, office rent and equipment, marketing
  • Buyback Guarantee: Reserves needed to fulfill obligations to P2P investors
  • Marketplace Fees: Fees paid to platforms listing the loans
  • Profit Margin: Companies' profit after covering all costs

Risks and Returns

  • Investor Interest Rates: Typically between 8% and 16% annually
  • Profit Example: Robocash has 18% profit margin (23.8 M USD profit out of 129.8 M USD revenue)

Regulation and Sustainability

  • Regulatory Tightening: Caps on interest rates by regulators
  • Compliance: Sustainable operations vs. edge-of-law operations

Investing Strategy and Diversification

  • Moral Considerations: Ethical implications of supporting payday loans
  • Alternative Investments: Real estate-backed loans as more socially beneficial
  • Liquidity: Payday loans offer higher liquidity; can access capital quicker
  • Balanced Strategy: Diversify by investing in both payday loans and real estate-backed loans.

Summary

  • Pros of Payday Loans: Fast payout, easy to obtain
  • Cons of Payday Loans: High costs for borrowers, risk of falling into debt spiral
  • Conclusion: Balance loan types for diversification; consider personal moral and financial goals

Call to Action

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Full transcript