What is a Buyback Guarantee?
A Buyback Guarantee is an obligation for loan originators to buy back overdue loans from investors. If you, as an investor, buy a loan where the borrower does not repay for more than 60 days, the loan originator is obligated to return your nominal capital and accrued interest.
The buyback guarantee is a protection mechanism for retail investors and is also often referred to as a buyback obligation in the market of peer-to-peer lending. All buyback guarantees aim to protect investors from non-performing loans and to recover the investments from borrower default.
- A Buyback Guarantee is an obligation to buy back loans over 30 to 90 days delayed. It acts as protection against non-performing loans in a private debt investment portfolio.
- The guarantor of the buyback guarantee is usually the company behind the loan originator or a group company of loan originators.
- The guarantor's financial strength determines the financial risk of a total loss, and there is a risk of moral hazard that the loan originators are taking too much risk when times are well, and borrowers are repaying at reasonable rates.
- Buyback Guarantees have been criticized for being an illusion and empty promise because it is the loan originator that acts guarantor itself and not a bank-like financial guarantee.
How Buyback Guarantee work
The investment platforms that typically offer buyback guarantees are most often websites that resell unsecured debt from loan originators that issue loans to borrowers from all over the world. This creates the need for an incentive to collect the debt, once a loan originator has sold it on the marketplace and no longer holds it on their balance sheet.
For other types of online investment loans such as in real estate crowdfunding, the loans are secured with the property as an asset to be sold in case of default and therefor not the same need to offer investors a contractual guarantee.
The debt collection process starts when a borrower stops repaying the loan in any debt agreement. When the borrower has not been paying their loan for 30 days to 90 days depending on the buyback agreement, the loan originators have a legal obligation to buy back the loan and take over the delayed/defaulted loan.
Practically speaking this means that the investor will receive a payment according to all or part of the outstanding debt and potentially some accrued interest in the overdue period.
This benefit for investors is that they get rid of overdue debt in the loan portfolio, recovering the amount and protecting against delayed payments and borrower default.
However, for you as an investor to receive a buyback repayment, it requires that the guarantor for the loan originator has money to buy back the debt. The guarantor is usually either the company of the loan originator (Loan Originator Guarantee) or a parent company of a group of loan originators (Group Guarantee).
Therefore, the financial strength of the guarantor will determine the financial risk of your buyback guarantee, and there is a moral hazard that the guarantor is taking on more risk than it should because it might not suffer the consequences. The risk is that loan originators take too much risk in the good times and when the market shifts suddenly go bankrupt. If a loan originator goes bankrupt, the investors risk not receiving buyback repayments and ultimately losing the entire investment.
Examples of Buyback Guarantees
- Mintos was one of the first platforms to introduce a Buyback Guarantee on its debt investments. Today, the platform offers a buyback guarantee on an individual debt note level after the loan is more than 60 days late.
- PeerBerry offers a similar buyback guarantee with 60-day overdue loans for all loan originators and their investments listed on the platform. Additionally, any investment from Aventus Group and Gofingo Group is covered by a Group Guarantee, mitigating the risk from an individual loan originator to the parent group company.
- Debitum Network offers a buyback guarantee for most of the loan originators on the platform once a loan is 90 days overdue.
- Robocash offers a buyback guarantee when payments are delayed only 30 days with all accrued interest.
Criticism of Buyback Guarantees
The idea of protecting the investment and offering an investment product with a sort of guarantee seems good but started getting criticized when the first loan originator Eurocent suspended their buyback obligations in 2017 on Mintos and later in 2018 Eurocent was declared bankrupt leaving the investors on the creditor list. The investors had an impression that the return was a guarantee, but as with any other company that declares bankruptcy, the guarantee of a loan originator going bankrupt was not possible to comply with.
This caused frustration among investors as the buyback agreement did not provide the repayments as expected and the investors ended up with defaulted loans with a very low recovery chance. The buyback guarantee has since then been criticized for being an illusion and an empty promise because the guarantor is the loan originator itself and not like a bank-issued financial guarantee. Mintos among other platforms have changed the name to Buyback Obligation to avoid confusion with using the term guarantee in finance. 
- Mintos: “What is a buyback obligation and how does it work for investments in Notes?”
- PeerBerry: “What does a buyback guarantee mean and how does it work?”
- PeerBerry: “What does the additional Group guarantee mean and how does it work?”
- Debitum Network: “What is the Buyback Guarantee?”
- Robocash: “What is a buyback guarantee?”
- Crowdestate: “The illusion of buyback guarantees”