Secondary markets in P2P lending are marketplaces that allow you to buy and sell already funded loans after the repayment period has begun. It allows lenders to exit loans early or start lending instantly instead of waiting for new loans to be available for funding.
The main option to get out of p2p lending loans without waiting for the loan to run out, is through the secondary markets. Some platforms that do not yet offer a secondary market, instead offer for you to sell it back to them at a discount (usually 0-5%). 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’re interested in selling one of your outstanding loans worth € 1,000 giving you the following possibilities:
- You could try to sell it for € 1,000 euro and get your money back.
- You could try to sell it with a premium of e.g. 2 %, resulting in a total price of € 1,020 euro and a € 20 profit minus fees.
- You could try sell it 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’re 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 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 occurred and might justify a higher price because of a lower risk.
- The macroeconomics have 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 premium.
Reasons to Sell a P2P Loan with a Discount
- You want to exit a loan quickly and can’t wait for the loan to be paid back.
This situation could happen for various reason: The situation for the platform or the borrower have changed, the alternative investments might be better in the market elsewhere and other reasons to exit early.
- 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 lot wanting to exit before their 1-5 year longer term loans are repaid.
- The macroeconomics have changed for the worse.
Changes in the macroeconomics resulting in fewer investors and general depression in the market, causing low liquidity and forcing people wanting to exit early, to sell at a discount.