What is a Buyback Guarantee? How it Works, Examples & Criticism

A rock climber used as an illustration for the concept of a buyback guarantee

If you’re looking to invest in Peer-to-Peer lending, you may have heard the term “buyback guarantee” or “buyback obligation” being thrown around. Both terms are an expression of the same, but what does it really mean? And how safe is a buyback obligation in the first place?

What is a buyback guarantee?

A buyback guarantee is a mechanism that many P2P lending platforms in Europe use to help protect investors from defaulting loans. It is a promise that the platform or a loan originator will buy back a loan that you have invested in if the borrower defaults or is delayed on payments for a specific period of time.

Usually, the buyback obligation activates after a period of 30-90 days depending on the platform and loan originator. In such a situation, the loan originator will take full responsibility for the loan, including any accrued interest.

This incentivizes investors to provide money to borrowers, as they have some assurance that they won’t lose money in case of default, which is one of the most significant Peer-to-Peer lending risks.

It is important to note that just because a platform offers a buyback guarantee or buyback obligation, it doesn’t necessarily mean that it is a good investment.

How does a buyback guarantee work?

There is no standard for how to buyback guarantee works. This is decided by the platform and loan originators. In most cases, buyback guarantees are triggered when a borrower fails to make timely payments for more than 30-90 days depending on the platform.

When the buyback guarantee is triggered, the issuer of the guarantee will repurchase the loan from investors for the full amount, including the accrued interest. This provides investors with assurance that even in the event of a default, they will not suffer any losses.

Even if a loan is protected by a buyback guarantee or buyback obligation doesn’t mean the investment is 100% safe. If the company that has the obligation to fulfill the guarantee goes bankrupt, there is no one to buy back your loan.

Examples of P2P lending with buyback guarantee

A lot of lending-based crowdfunding platforms focusing on P2P loans offer a buyback obligation on loans. Here are some places to invest in P2P lending with buyback guarantee:

1. PeerBerry

PeerBerry is a European peer-to-peer lending platform that connects individual investors with loan originators. They offer a wide range of loan originators that offer secured loans with the PeerBerry buyback guarantee.

The buyback guarantee is the loan originators’ obligation to exercise buyback of the claim if the borrower delays the payments by more than 60 days. In such a case loan originator will buy back loans in full with the accrued interest.

2. Lendermarket

Lendermarket is a Peer-to-Peer (P2P) lending platform that matches borrowers with investors seeking to fund their loan requests. The platform allows investors to invest in loans with a buyback guarantee.

This means that if a loan goes becomes overdue, the loan originator will buy back the loan after 60 days and pay back the outstanding amounts to investors, including accrued interest. This provides additional protection for investors.

Loan originators on Lendermarket are required to keep enough cash around to be able to compensate for any defaults.

3. Mintos

Mintos is a P2P lending marketplace that connects investors with loan originators. Investors can invest in loans from loan originators, who are carefully selected and monitored by Mintos.

The Mintos buyback obligation is a guarantee issued by the loan originators to the investors. Through the guarantee, the loan originators promise to buy back a particular loan, should the borrower be more than 60 days late with payments.

In such a case, investors will be paid both the nominal value of the outstanding principal as well as the accrued interest. This protects investors from the risk of default on the loan.

Criticism of the buyback guarantee and buyback obligation

Buyback guarantees and buyback obligations are not 100% safe. While they may offer some protection for your investments, these guarantees are not foolproof.

It is still possible for a company that has the obligation to fulfill the guarantee to go bankrupt, leaving no one to buy back the loan. Additionally, the terms of the guarantee may not provide enough protection in the event of a default.

For these reasons, it is important to do due diligence and understand the terms of any buyback guarantee or obligation before investing in a loan. If you are new to P2P lending, you might also want to educate yourself about other ways to manage risk in P2P lending.