In addition to being able to borrow money from other individuals, Credit Loan’s credit marketplace also offers investors the opportunity to lend money to other consumers.
Comparison of Credit Loan and Bonds
Interestingly, however, is the question of how private lending of money as a way of investing in comparison to bonds?
Why just bonds, one or the other will ask for sure now. The answer lies in the structure of a loan agreement: in return for borrowed money, an investor receives the repayment in the form of monthly installments, which consist of interest and repayments. The installments remain the same for the duration of the loan. Similarly, the structure of most bonds is where the investor acquires an option to redeem the bond at face value at maturity and pay a coupon, usually annual. As such, borrowing money from Credit Loan can be viewed as a kind of private loan, repaying part of the lent money and a fixed interest rate month after month.
The interest rates paid on Credit Loan average are found daily in the marketplace statistics. In particular, the interest rate, the risk premium, the expected return and the expected payment ratio are interesting. The focus will be on loans with a maturity of 36 months.
Expected payment and default rates for 36-month loans:
|Expected payment ratio||98.8%||97.8%||96.6%||96.1%||95.1%||93.7%||90.6%||87.1%|
|Expected default rate||1.2%||2.2%||3.4%||3.9%||4.9%||6.3%||9.4%||12.9%|
Interest rate, risk premium and expected return on loans with 36 months maturity:
|Interest rate (average 60 days)||7.2%||9.0%||10.6%||10.2%||11.4%||12.8%||14.5%||16.0%|
In order to make Credit Loan’s opportunity-risk profile comparable to investing in corporate bonds, I have assigned the default probabilities of the individual credit rating classes to the corresponding ratings of bonds.
There is a statistic with the default probabilities of bonds depending on rating and maturity. Since the focus is on online loans with a maturity of 36 months, the probability of default of bonds with a residual maturity of four years is best suited for comparison. According to the source mentioned above, the following values result:
|Failure probability at
4 years duration
Based on these data
Credit Loan’s credit quality grades can now be compared with individual ratings of bonds. This also takes into account intermediate levels in the bond rating such as BBB + or BB-:
|Class of credit at Credit Loan||A||B||C||D||e||F||G||H|
|Equivalent bond rating||BBB +||BBB-||BBB-||BBB-||BB +||BB +||BB-||B +|
|Expected return Credit Loan||6,70%||8.00%||8.90%||8.20%||8.90%||9.40%||9.30%||9.00%|
|Expected return bonds||6.0%||7.00%||7.00%||7.00%||7.40%||7.40%||7.00%||7.30%|
Bond yields were calculated as the average of at least four Euro corporate bonds with a corresponding rating and a residual maturity of approx. 3 years.
For all rating classes, the above comparison shows that with estimated same default risk and remaining maturity, lending money through Credit Loan’s credit marketplace has a higher return expectation than buying corporate bonds.
With this in mind, I can wholeheartedly recommend to investors how to use Credit Loan as a custody admixture for their own investments.
The author operates under a long-established financial portal, which is dedicated to the comparison of various financing offers and the information of consumers on all facets of the financial sector.