How might crowdlending do in a financial crisis?


Wow, there’s a lot of uncertainty lately regarding the current yield curve inversion, huh? What? Don’t you know what I’m talking about? Ok, at the end of this post at least you’ll know the basics and how that could affect your investments. Take a look at my personal portfolio to find the best crowdlending platforms.

What is this thing called the yield curve?

In a nutshell, a yield curve is a chart that displays the distribution of bonds interest rates along different maturity dates or duration terms. The most popular yield curve compares the three-month, two-year, five-year, 10-year and 30-year on US Treasury debt.

Ok, a picture is worth a thousand words:

For instance, on a 1K investment in a US bond of 3 years at 1% interest rate we will receive the following payments:

  • Year 1: 10€
  • Year 2: 10€
  • Year 3: 10€ + 1000€

Setting a bond’s rates involves lots of factors. One of the most important ones is the term of duration (bait). Normally, the greater the bond, the higher the return, as the investor will not be able to access their money for a greater period of time (and that should be paid accordingly, right?). That tendency would generate a healthy chart as displayed above.

But sometimes, the curve can turn flat, or even inverted. Let’s compare the US Treasury bonds chart over time:

Why does that happen? Because of the fear of a recession in the next months or years. Let me explain, if there is an incoming crisis in a country, they will lower the long-term interest rates assuming that the 10y bonds will revalue and make a profit. Also, as the demand increases in that area, their rates drop (aka Law of supply & demand, mate). On the other hand, the short-term rates rise because if there is uncertainty in the market, so the investors need extra motivation to buy that product. The lower the demand, the sexier the prices.

Historically, an inverted yield curve has been an early indicator of a financial recession. In the following chart, we can see that all global financial crisis was preceded by an inverted yield curve:

Scary, huh?

However, nobody can predict the future 100% (black swans exists), plus, there are more macro indicators like the IMS-PMI or the Unemployment Claims which have not reached the same conclusion (yet).

How that might affect to crowdlending?

The thing is that crowdlending (or p2p lending) is a relatively new financial product which appeared on the late ’00s. Note that the two oldest crowdlending platforms, Lending Club and Prosper, were founded in 2005 and 2006, respectively. Therefore, unlike stocks or bonds that have decades of track records, we just have the last huge recession of 2007 as an example, when they both were just opening their gates to the public.

Anyway, if we take a look at all loans issued by Lending Club during the recession, they still ended up with positive numbers:

Source: NSR

Due to the lack of liquidity, people will contract more loans, but of lower quality though, as the borrowers will be in a weaker position and consequently, they’re more likely to default. Thus, the platforms will charge them extra interest. Does that mean that they will preserve the buyback guarantees keeping the higher rates for the investors? Keep dreaming. If they want to preserve the buyback guarantee they will need to increase their emergency funds for obvious reasons by dwindling the interest rates to the investors.

That’s why we must pay special attention to the platform and the lender’s current performance and track history, and increase our diversification rate. I’ve created two tools called Mintos Lender Ratings and Mintos Explorer for that purpose.

On the other hand, there are companies like Bondora which doesn’t provide buyback guarantee, so perhaps some of their products such as Go&Grow or Portfolio Pro might stop being profitable and ending up with negative numbers. I plan to post a Bondora review soon with an in-depth analysis of their loan book (spoiler: not my cup of tea).

The bottom line

With that said, recall that a financial crisis is likely to hit most of the financial products, so the point would be to compare crowdlending with other options. During the last 2007 recession, in contrast to crowdlending’s positive return, the S&P 500 lost a third of its value during this same period (holly molly!). Therefore, I strongly believe that crowdlending is not a bad choice at all. Nevertheless, I’ll study other options such as cryptocurrencies in the following weeks.

What would you do in that scenario? Which kind of financial products would you chose? Leave your opinion in the comment section below so all investors could beneficiate!

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