P2PIncome Glossary | Found A Financial Term That Needs Explaining?
Asset-based investments
Asset-based investing is where the loan in which the person has invested, is secured by assets or a group of assets.
Assets
Things that are resources owned by an individual or company, and which have future economic value that can be measured and expressed in currency like US dollars or Euro. Examples include cash, investments, accounts receivable, inventory, supplies, land, buildings, equipment, and vehicles.
SPV
Special Purpose Vehicle, also known as a Special Purpose Entity (SPE), is an investment structure that is technically a subsidiary of the company that created it. This means that it's reported on a separate balance sheet; has a scope which is just a subset of the parent company's activities; and is financially independent of the parent company and from other SPVs under the parent's umbrella. In essence, each investment structured as an SPV is it's own limited liability corporation (LLC).
REIT
Real Estate Investment Trust is a company that owns, and in most cases operates income-producing real estate. REITs own many types of commercial real estate, ranging from office and apartment buildings to warehouses, hospitals, shopping centers, hotels, and timberlands. Some REITs engage in financing real estate.
AUM
Assets Under Management, or in finance otherwise known as 'funds under management' measures the total market value of all the assets that a financial institution such as a mutual fund, venture capital firm, or broker manages on behalf of its clients and themselves.
Accredited Investor
An accredited investor, as defined by the federal securities regulations of the United States, is an individual that must have a net worth (or joint net worth with his/or her spouse) exceeding $1 million, or assets under management greater than $1 million, excluding the value of his or her primary residence.
Correlation
Correlation refers to the mutual relationship between two things. In finance, correlation is used to describe how different investments relate and respond to the same market forces. 'Highly correlated' investments respond similarly to the same market forces. 'Uncorrelated investments', in contrast, respond very differently to the same market forces.
Due Diligence
The process by which originators and prospective investors perform a comprehensive appraisal of a business or offering to establish an understanding of its assets and liabilities and evaluate its commercial potential.
Loan Originator
An originator is an individual or firm who posts offerings to peer-to-peer investment platforms. Originators perform due diligence and determine the terms of the loan with the borrower. The originator then turns to p2p lending sites to fund part, or the entire loan.
LTV
Loan To Value is the ratio that tells you how much of a property you truly own compared to how much you owe. This ratio is used for several types of loans, including home and auto loans (both purchases and refinances).
APR
Annual Percentage Rate refers to the annual rate of interest charged to borrowers and paid to investors. APR is expressed as a percentage that represents the actual yearly cost of funds over the term of the loan, or income earned on an investment. The APR provides consumers with a bottom-line number that they can then easily compare to rates from other lenders.
IRA
Individual Retirement Account is a form of 'individual retirement plan' in the United States, provided by many financial institutions which provide tax advantages for retirement savings.
SME
Small and medium-sized enterprises or SME's refers to companies that are not organizations but are smaller in number, ranging from 1 (small) - 100 employees (medium). Generally speaking SME's make up the majority of the workforce and national GDP.
IRR
IRR or the Internal Rate of Return is the future projected return on investment. The IRR is an estimate of the future rate of return and should not be confused with the actual rate of return.
XIRR
XIRR or Extended Internal Rate of Return is the personal rate of return. This method calculates returns on investments where there are multiple transactions going on simultaneously.
Dividends
Dividends are either regular or one time payments made out to share holders of a company. Dividends are determined on how much share of a company a shareholder owns. The amount a company issues can be found in the owners equity section of their balance sheet of their quarterly and annual reports.
Yield
The full amount of capital attained from the investment. It is generally described as a percentage, investment platforms will advertise an X percentage yield on their offered investments.
Auto Loans
Auto loans specifically refer to loans for cars. Individuals apply for a loan for a car and they can justify their ability to pay it back with a stated income and the car as collateral. In such a case, if the individual is unable to pay back their car loan for whatever reason than the lender will sell or auction the car to a bidder and collect the remainder of their capital.
Consumer Loans
Consumer loans, also known as personal loans comprise of a wide array of loan requests. Borrowers can under consumer loans request capital for home renovation, student loans, engagement rings, birthday parties and so on. Consumer loans are about what ever can be consumed. As long as their is a stated income the borrower can be approved. Consumer loans can come as either secured loans or unsecured loans, often, borrowers can put their mortgages on their cars or houses as collateral and other times, lenders can approve borrowers solely on their credit score.
Buy Back Guarantee
A buyback guarantee only applies for P2P lending companies that operate with loan originators in their ecosystem. These guarantees imply that if the borrower defaults on his payment than the loan originator steps in and covers the missing funds to the investor. A buyback guarantee however, is only as reliable as the company that guarantees it. Buyback guarantees do not cover loan originators that are going insolvent. It is best to understand a Buyback guarantee as a first line of protection for lenders.
State Guarantee
State guarantees are a lot of different from Buyback guarantees. Instead of Loan originators being the ones to bail out borrowers it is instead the state that bails out their borrowers. The only instance of this so far is France that has promised to bail out SME's on Octobers platform.
Auto-Invest Tool
The auto-invest tool can be found on more than half of the P2P lending sites. They all come with their own terms and conditions, guarantees and risks. The idea behind it is simplified investing. Users can simply deposit, in a few seconds set up their auto - investing tool, indicate their risk exposure and let the company algorithm do the rest of the work. In general the auto-investing tool works well on the majority of websites, however, one can experience a fair bit of cash drag by using this method.
Secured Loans
A secured loan simply implies that there is collateral behind the loan. In the case of a loan defaulting there is a tangible asset that can be sold to mitigate the loss of the investment.
Unsecured Loans
Unsecured loan implies that there is no collateral, which means there is a higher return due to a higher risk. It is based on a borrowers credit score and stated income.
Defaulted Loan
A loan defaults when a borrower is no longer able to pay back their loan agreement. In the p2p lending space this can mean a lot of things. There are different agreements between loan contracts and each company has their own plan of action in the case of a defaulted loan. Every company has a default rate which implies the percentage of loans on the site that are never paid back.
Fund Recovery
In the case of a defaulted loan some companies implement fund recovery strategies. This can mean a few things but primarily there are two fund recovery strategies. One, is a form of a debt restructuring, it could mean elongating the timeline, allowing for more interest over time but smaller regular payments. It could also mean giving a company a little more time to stabilize their finances as well a parent company providing assistance in terms of man power or knowledge, for the debt restructuring.
Two, is litigation. This is generally a messy affair and all participants are left disappointed. The p2p lending site loses borrowers and investors because the borrowers become untrustworthy and the lenders become skeptical. It takes a lot of time and effort for fund recovery through litigation. The time and effort on behalf of the debt collectors and court work costs generally the majority of the principal. So after all the litigation is over lenders receive small fractions of what would have otherwise been the amount invested and interest accrued.
Principal
Initial amount of capital in an investment.
Debt Consolidation
In essence, debt consolidation is taking a loan to pay off preexisting loans. Debt consolidation is often done to protect credit score or a pay preferable interest rate on the loan. Debt consolidation is about transferring a loan to a different type of loan with different interest rates. For example, a borrower may take a consumer loan out from P2PIncome in order to cover his credit card bills, the interest he pays on the loan is less than that of the credit company.
Risk Management
Risk management is the process by which value is determined in a given venture. Through a series of analyses and identification of a given market, experts in their fields make assessments on whether or not something is worth investing into and how valuable the investment is. Some of the specifics that are generally measured are, market volatility, inflation, recession and bankruptcy. Through these analyses companies can either determine whether to invest, or if post-investment, strategies to ensure profitability.
Mortgage Loans
Mortgage loans are loans that are taken out with the mortgage as collateral. Such loans may be for renovations, purchasing new homes or consumer loans, borrowers then put up their property until it's paid back in full. If a loan defaults, the property can be sold and lenders can receive their principal back.
Secondary Market
On Peer-to-Peer networks liquidity can be an issue. Most loans that are issued range from 3 - 5 years, most users struggle with the lack of cash movement. Many platforms offer a secondary market, where lenders can offer their loans marked up or marked down for the sake of receiving their loans back earlier than the agreed date.
Loan Originator Aggregator
Loan Originator Aggregators or LOA, are P2P lending platforms that offer a variety of loans from various loan originators. The platform then ranks the loan originators based on customer satisfaction and historical performance. These platforms make a profit from fees taken from the loan originators and borrowers.
Direct & Indirect Investment Structures
A direct investment structure means the lenders buy claim rights against the borrowers directly. An indirect structure means that lenders buy claim rights from the third party loan originators or LOAs. This illustrates where the responsibility falls when a loan defaults. In a direct investment. the borrower must fulfill his end of the deal. In an indirect investment structure, the loan originator fulfills the end of the deal.
Cryptocurrency
Cryptocurrencies are digital currencies that utilize encryption methods in order to secure and decentralize the nature of transactions.
Stablecoins
Stablecoins are cryptocurrencies which utilize an algorithm which to inflate and deflate the value of the stablecoin to stabilize its worth. Stablecoins are often used for Peer-to-Peer lending in the market known as Decentralized Finance or DeFi.
Collateral
Something valuable generally a car or a piece of property offered up and possibly forfeited as security in the case of defaulted loan.
Credit Score
A credit score is a numerical assessment made by credit institutions to determine how likely a borrower is to repay his debts.
Litigation
Litigation is the process of resolving disagreements by filling and answering through a public court system or other legal framework.
Lender/ Borrower Ecosystem
On P2PIncome we assess and analyze the entire ecosystem of a companies platform. We determine whether or not the platform is profitable, scalable and backed by instruments that make the experience hassle free and profitable. This is done by comparing and understanding the different tools to incentivize investors and provide affordable loans for borrowers.