distribution of interest rates on Mintos

It’s a hot topic in online discussion groups and we all see it in our portfolios: the interest rates on Mintos keep dropping. In my opinion this is the fallout from Invest and Access which was introduced on Mintos in early June 2019.

What is the current situation?

In September we saw a strong decrease in available loans on the Mintos primary market. Also, the interest rates had dropped down to around 11% on average. Now, in October, the number of availabel loans is back up but the interest rates have dropped even further. About 90% of all EUR loans give 10% or less interest. The color coded graph below shows just how severely the market situation on Mintos has changed since August.

the fallout of invest and access. distribution of interest rates on Mintos
The interest rate distribution for all EUR loans on Mintos as of Oct 18th 2019. The average interest rate is now dropping below 10%.

Is this limited to Mintos?

The natural question is: is this drop in interest rates a general trend in the p2p loan market or is this something specific to Mintos? A nice comparison can be drawn with Bondora. Both Mintos and Bondora offer lots of statistical data to evaluate their respective loan markets.

Equivalent to the graph above, I analyzed the interest rate distribution for the Estonian loans on Bondora. Basically, we see that the rates remain stable over time. What is particularly important to note is that the introduction of Bondora Go&Grow had no effect on the interest rates. The reason is obvious: a borrower in Estonia does not care how Bondora collects the funds in order to issue loans. Whether investors on Bondora use Go&Grow or the Portfolio Manager is irrelevant for the borrower. So, we see that the p2p loan market in Estonia is stable in terms of interest rates.

distribution of interest rates on Bondora for Estonian loans
The interest rate distribution for all Estonian EUR loans on Bondora as of Oct 18th 2019. Interest rates remained relatively stable over teh past 2 years and were not really affected by the introduction of Go&Grow back in June 2018.

How about Mintos?

The same analysis can be done for Mintos. In the graph below I plotted the interest rate distribution of Estonian loans on Mintos. The difference is obvious! On Mintos, the rates started to drop also for the Estonian loans and this started soon after Invest&Access was introduced. It is the same picture we see in the first graph for the entire Mintos loan portfolio.

the fallout of invest and access. distribution of interest rates on Mintos for Estonian loans
The interest rate distribution for all Estonian EUR loans on Mintos as of Oct 18th 2019. The average interest rate has dropped to around 11%.

Why does this happen on Mintos?

There’s a major difference between Bondora and Mintos. Bondora issues loans directly to the borrower. So, in “Mintos speak”, Bondora is like a loan originator. Mintos on the other hand is marketplace in which many loan originators compete for funding from investors. And the only way for them to compete for the investors’ money is by offering competitive interest rates.

Now, while Bondora Go&Grow does not change the loan market in Estonia, the introduction of Invest&Access on Mintos drastically changed the loan market on Mintos. It essentially made the competition between loan originators unnecessary since Invest&Access pours money into low and high interest rates alike. Loan originators have no incentive anymore to offer high interest rates. This is the fallout from Invest and Access!

For the loan originators, this is a great situation. They can pay lower interest rates to investors and still receive sufficient funding through Mintos. At the same time, the interest that the loan originators take from their clients (the borrowers) remained stable. That’s what we saw in the Estonian loan market analysis above and more pointedly also in the image below. The loan originators are simply increasing their profit margin.

Varks internal interest rate versus paid out interest
Interest rate APR that the Mintos loan originator Varks charges to its clients versus interest paid to the investor. Between August and September 2019, the paid out interest dropped by around 30% while the APR remained stable.

Who is to blame?

Honestly, everyone using Invest and Access has a part in this fallout and is to blame. Every I&A investor effectively lowers his own return on investment and that of everyone else. The promise that Invest&Access made when it was introduced was just too alluring: Earn 12.5% interest without any effort. It is clear that this product was immensely successful. Today, over 70% of all new investors use Invest&Access with an average portfolio value of about 4000 EUR!

And now the average interest rate is down to 8.9%. Not so attractive anymore, right? And still, I’m sure that the popularity of I&A will remain high. Simply because most investors don’t want to be bothered to even spend 10 minutes for setting up an Auto Invest strategy which would easily give them 3% more interest.

Since more and more new investors are joining Mintos I’m afraid this situation will not get better. Interest rates will stay as they are today or even decrease further.

What are the alternatives?

First of all, there’s no need to panic. I will keep my money on Mintos for now and monitor the situation. For the time being, I invest into short term loans with 10% interest and higher to have a high cash flow. If the situation improves: great. Then I can quickly invest into higher interest loans again. If it gets worse and can easily stop re-investing and withdraw funds.

Alternative platforms with a functionality similar to Mintos are easy to find. Grupeer is running smoothly and will give you between 12% and 13% return on profit. The Iuvo-Group only cooperates with stable and profitable loan originators and you can expect around 11% effective interest rate. And last not least, there’s always Bondora which offers a highly diversified investment with a stable return of 6.75% and instant liquidity.

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