What are Secondary Markets in P2P Lending?

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Secondary markets in peer-to-peer lending are marketplaces that allow you to buy and sell already funded loans after the repayment period has begun. This allows lenders to exit loans early or start lending instantly instead of waiting for new loans to be available for funding.

If you are looking to get out of a p2p loan and do not want to wait for the loan to run out, your primary option is to make use of a peer-to-peer secondary market. However, since not all platforms offer secondary markets for loans, always make sure to check what features the platform offers before you start investing – particularly if you know you might be in the need of exiting the loan early.

Instead of a providing a p2p secondary market, some platforms offer lenders the option of selling the loan back to the platform company at discount (usually between 0-5%), but especially a lot of newly founded platforms do not have any options of exiting the investment early.

Fees on the Secondary Market

Some P2P platforms charge a percentage fee of the loan to sell or buy the notes on their secondary marketplace. Most secondary market fees are charged to the seller and a growing number of marketplaces do not charge anything directly such as Mintos.

If a fee is charged, the price for buying and selling is typically between 0.25% and up to 1% but at a few platforms, the fee can exceed 1%. Always check the exact costs on your p2p platform. They can usually be found on the fee structure page and will be called ‘Secondary Market Fees’ or ‘Exit Fees’.

When considering trading on secondary markets it is important to contemplate how often you will trade or need to exit early. This will give you an idea of the profitability in repeated selling fees. A price of 1% of the outstanding principal will easily take a huge cut out of your profits. But even though platforms might not charge fees directly, only considering the secondary market fees do not cover the overall costs of the P2P lending platform, it might have low selling fees but high overall costs.

Selling and Buying with a Premium or a Discount

Most platforms allow you to set the price when selling the outstanding loan or part of it.

The “price” of the loan is often described as the outstanding loan plus/minus a premium/discount, allowing you to sell it for more or less than the outstanding debt.

An example could be the following. You are interested in selling one of your outstanding loans worth €1,000 giving you the following possibilities:

  • You could try to sell the loan for €1,000 and get your money back.
  • You could try to sell the loan with a premium of e.g. 2%, resulting in a total price of €1,020 and a €20 profit minus fees.
  • You could try to sell the loan fast by giving a discount of e.g. 2%, resulting in a price of €980 and a €20 loss plus fees.

Platforms allowing premium and discounts on their secondary market often put a cap on the maximum and minimum percentage you are allowed to sell and buy loans at. The most used limit is 3%.

Why Buy Loans with a Premium or a Discount?

A first hand it might seem incomprehensible why anybody would want to buy or sell loans with up to a 3% premium or discount. However, there can be a good reason to do so. Some of these are listed below.

Reasons to Buy a P2P Loan with a Premium

  • You want to lend money faster than the time it takes for new projects to get listed and funded.
    There are often a lot more options on the secondary market than on the market for new loans. Also, new loans may take days or weeks to be fully funded, but loans on the secondary market can be bought instantly.
  • You want to diversify your risk quickly because you know that diversification is key in P2P lending.
    This is possible on the secondary market where you have instant access to loans backed by different assets spread on a variety of currencies, countries and loan durations.
  • You know more about a borrower than the original lender did.
    A history of repayments and positive development for the borrower have occurred and might justify a higher price because of lower risk.
  • The macroeconomics has changed for the better.
    A change in the macroeconomics could mean that the interest rates available on the primary market are lower than what you would get by buying loans with a premium.

Reasons to Sell a P2P Loan with a Discount

  • You want to exit a loan quickly and cannot wait for the loan to be paid back. 
    This situation could happen for various reason. For example, the situation for the platform or the borrower might have changed, the alternative investments could be better in the market elsewhere, or the lender could simply be in need of cash for personal reasons.
  • The situation with the borrower has changed for the worse, resulting in higher risks for potential buyers. 
    Doubts about the repayments will cause the market to require a lower price for the loan.
  • The situation with the platform has changed for the worse, resulting in higher risks for potential buyers. 
    Doubts about the continuation of the platform will cause a demand among investors to exit early from especially longer-term loans.
  • The macroeconomics has changed for the worse. 
    Changes in the macroeconomics might result in fewer investors and general depression in the market, causing low liquidity and forcing people wanting to exit early to sell at a discount.