P2P insights: why CashBack is better than high ROI Investors, who have been with Grupeer since the beginning of our journey remember that we used to offer interest rates a bit higher than today. Lowering the interest was not our whim, but the tendency of the market. Grupeer, however always trying to negotiate CashBacks for our investors and in this article, we want to highlight why the CashBack is actually more beneficial for investors.
What is an interest rate?
The interest rate is a percentage of the principal charged by a lender. The economic force of the interest rate is incredible- the world’s brightest minds all over the planet carefully negotiate on a monthly basis what level the interest rate set by Central Banks should be. Finance professionals make the forecasts, bet on it and even speculate if the interest rate will remain unchanged, go up or down.
There is an explanation behind such worship- the interest rate affects countries’ money supply, savings and investment rates, demand and even inflation. The low interest rate set by the Central Bank is aimed to stimulate the economy by demotivating savings. The economy with low-interest rates tends to have higher demand, as people rather spend and companies rather invest in their operations or fixed assets. Also, it is cheaper to borrow.
But what about private investors?
It’s great when the government has such a tool, such as monetary policy to steer the wheel of the country’s economic ship, however, the private investors are missing out when the interest rates are low. Individuals are working hard and no matter what is their future goals, be it saving for trip or child’s education, prosperous retirement or just a purchase of a nice car, they are losing money when nominal interest rate (rate offered by banks) is lower than the inflation. In Europe, for example, it is the case, as ECB’s rate is currently zero, whilst inflation rate is around 2%.
What can be done?
It is clear that leaving your money in the bank deposit account is hardly investment into your future, as the actual value of your money will decrease with negative real interest rates. (NB. Real interest rate = nominal interest rate – inflation rate). Thankfully, right now there is a wide variety of the investment tools, which will not only beat inflation but also will earn a solid income. The P2P lending is classified as alternative investing and usually, it earns a higher interest rate than the other asset classes. P2P investments can be added to your investment basket to create a diversified and balanced portfolio. The high returns can satisfy the short-term investment goals; however, it could be a nice addition to your retirement portfolio (Grupeer featured the whole article on this topic, you can read it here).
Why P2P investments’ interest rate decreases?
We all agree that P2P loans offer very competitive interest rate, due to working with credit companies whose clients for different reasons decided to borrow not through the traditional financial system. So why does the interest on P2P investments tends to decrease?
This is the cyclicality of the P2P lending markets- all P2P platforms started with high interest rates, which gradually decreased. The business model of P2P lending platforms is relying on the loans issued by non-bank credit institutions. When banks are conservative in their lending practices, the amount of loans issued by alternative finance institutions increases, making this a fruitful time for P2P platforms. On the other hand, when banks are increasing their loan approvals, clients go away from non-bank credit companies. Ten years ago, banks rejected 13% of all loan applications, now, this figure is 5%1.
So, this is logical that eventually, percentage passed to P2P investors will be lower, as non-bank credit institutions will lower their rates, to attract borrowers. The lower return environment is not only applicable to peer-to-peer investing- all asset classes show declining earnings.
Nevertheless, Grupeer offers the highest interest rates to investors on business loans in euros among other peer-to-peer platforms. Sure, there are rates up to 18% offered by others, but these loans are subject to currency risk, as they are denominated in other currencies, so investors are paid a premium to compensate for such risk. On the largest European peer-to-peer investment platforms, the highest interest for euro-denominated business loans protected by BuyBack guarantee is 11.5%. Given the average interest rates for business loans offered by banks in the EU was 1.64%2 in October 2018 it is very generous.
Grupeer continuously negotiates special promotions aka CashBacks with our partners for our investors. Almost every week you can find a cherished blue CashBack sign next to one of the loan deals available for investments. Usually, the CashBack is 1%, but sometimes can reach 2%, when investing large sums. It all depends on the terms we have negotiated with our loan originator, but this is even better than high-interest rate! Why? Because with CashBack you receive 1-2% from your invested sum instantly, or within a month of making an initial investment. This considerably reduces the credit risk (risk of not getting paid) and makes more money available for the next investment. You don’t have to wait until the maturity date to reinvest your money. CashBack frees up capital for the next investment and lets you earn even more money! So, don’t forget to add money to your Grupeer investor’s account and set up Auto-invest strategy to benefit from such offers, as they are gone with a blink of an eye!