Investing on Bondora pretty much shows me what happens behind the scenes on platforms like Mintos: loans do fail and not in small numbers. On Mintos, these failed loans are hidden by the buyback guarantee that most loan originators offer but of course I do pay for this by receiving lower interest rates compared to Bondora. Nonetheless, I think that from a psychological perspective, investing on platforms like Mintos is much more pleasing as you don’t have to deal with losses (unless of course, a loan originator fails like in the case of Eurocent back in 2017).
To reduce the amount of failed loans on Bondora I strongly advise against using the standard Portfolio Manager that Bondora offers. It will buy all kinds of crappy loans for you and I also made this mistake when I got started on Bondora.
By now I’m avoiding Bondora’s First Market altogether and only invest through the Secondary Market by buying loans which already have several months of maturity. This decreases the risk that the loans will default later. It’s a more active investment strategy and I explain this in more detail here.
In case you don’t want to spend time on the Secondary Market and use the convenient Portfolio Pro Manager my recommendation is to only invest in loans from Estonia since these loans have the lowest default rate. In my opinion, the loans with B-E rating will give the best performance as they have a good balance between interest rate and default rate, see the table below.
The high risk loans from Estonia and all loans from Spain and Finland have very high default rates of more than 30%. Due to the slow recovery process for failed loans this creates a severe cash drag. To make matters worse, only about 40% of failed loans are recovered.
Based on the available loan data from 2016 to 2018 I calculated a scenario for the effective interest rate of loans from Estonia. The scenario assumes a loan duration of 48 months and that all loans will fail after 2 months loan duration to the extent indicated by the average default rate. No interest is obtained from these failed loans and only 40% of the principal investment is recovered after 48 months. This is basically a worst case scenario since most loans will run for more than 2 months before they default.
The results show that loans with C, D and E rating should give the highest return on investment (I also include B rated loans in my portfolio to be a bit on the conservative side). The higher rated AA and A loans give a worse performance due to low interest rates but still significant default rates. For F and HR rated loans the default rates are too high. Of course, this statistical analysis only applies for a highly diversified portfolio with hundreds of loans which I recommend anyway for investing on Bondora.
For people who want to put their mind at ease I’d recommend to use the Go&Grow option. Sure, the returns are lower (currently 6.75%) but you get quick access to your cash and it helps to diversify your overall investment portfolio. I use it like an instant access savings account and store some funds there which I might need quickly, e.g. for a vacation.