Tag Archives: credit score

FIREOF now offers risk categories for its loans listed on Mintos p2p lending platform

Mintos logo

Spanish mortgage lender FIREOF Management, which recently launched on Mintos, now offers investors the opportunity to invest in its loans by selecting them based on loan risk categories. The inclusion of the risk categories will allow investors to make more informed investment decisions.

FIREOF loans have a historical track record of 0% loss given default (LGD) and 0% bad debt rate due to the high loan-to-value ratio (average below 35%), thorough analysis of the borrowers and collateral as well as the personal guarantee provided for the loans. The risk of losing the principal has historically been very low and the main risk has been related to liquidity – locking in the investment during the court collection process which varies and averages 18 months.

FIREOF will provide loan risk ratings in each scoring category based on the predicted probability of default (PD) – assessment of the probability of loans becoming 90 days late when the court collections process is being initiated.

FIREOF Risk Categories

 Category (Score)        PD*             Interest rate to investor
AAA (1000-851) 0,63% – 0,70% 5,00% – 6,00%
AA  (850-701) 0,95% – 1,04% 5,50% – 6,50%
A (551-700) 3,76% – 4,15% 6,00% – 7,00%
BBB (500-551) 5,04% – 5,57% 6,50% – 7,50%
BB (451-500) 5,79% – 6,40%
B (331-450) 7,24% – 8,00%
C (0-330) 9,78% – 10,81%

* Probability of default (loans going into court collection, more than 90 days past due). Historically FIREOF has been able to recover 100% of principal for all defaulted loans.

FIREOF bases the risk categories on their scoring model that is being used to assess the riskiness of the loans they are issuing. Their scoring model, based on a FICO score (a type of credit score created by the Fair Isaac Corporation), has been specifically designed for the mortgage secured lending business in Spain. It takes into account various factors in three main areas to determine the credit quality: borrower profile, collateral liquidity and loan type risk.  

FIREOF takes into account the loan type risk (35% of score), collateral liquidity (35-40%) and borrower profile (25-30%) to determine the credit score for each loan. Scores range between 0 and 1 000. In general, scores above 550 indicate a good credit quality. In contrast, loans with scores below 500 mean the credit quality is inferior – borrowers might find it difficult to repay monthly instalments, the quality of the collateral is sub-optimal or the loan type holds a larger risk. Currently, FIREOF plans to offer only loans with category BBB and higher for investment to Mintos investors.

Loan Type Risk

In order to determine the loan type risk, different aspects of loan parameters are taken into account, including the amortization type, the term of the loan, APR charged to the borrower, loan amount and reason for taking the loan.

Collateral Liquidity

To reach an acceptable score for collateral, collateral type (internal liquidity), market size and liquidation price (external liquidity) are analysed together with government public ratios to measure the potential of selling the collateral in case the borrowers of FIREOF fail to repay their liabilities.

Loan to value (LTV) and loan to liquidation value (LTLV) are calculated on a principal cap basis. In addition, fraud detection triggers are deployed at an early stage.

Borrower Profile

As a general rule, borrower information is provided and analysed by the Spanish central bank. The information analysed includes the average default probability by age, debt to income ratio (DTI) and payment incident records in combination with the minimum income (of the borrower). The decision-making process is continuously improved based on past performance information

Established in 2015, FIREOF is an asset-secured lending business whose mission is to provide a financial bridge to Spanish consumers. FIREOF pursues a win-win relationship with their borrowers. The company is fully licensed and audited and it provides its credit products through established brokers.

Top 4 reasons why borrowers choose P2P lending platforms instead of banks

As investors, hopefully you are already aware of the multitude of advantages available to you by investing with a peer-to-peer lending platform. An important questions that is not so commonly discussed is, why do borrowers use P2P platforms instead of banks?

Below are the top 4 reasons why borrowers choose a P2P platform rather than a bank for an unsecured loan.

1. Purpose

Whilst every P2P platform is different, collectively they are certainly much less restrictive than the traditional banks when it comes to the purpose of a loan. Whether it’s for real-estate, starting a business or a once in a lifetime vacation trip – P2P platforms cater to all. That being said, most choose to specialize in a specific area.

2. Faster

Imagine – You decide you need to take out a loan, great. Now, you call the bank to make an application and they tell you that you will need to go to their city center branch and meet with an advisor. You take a day off work, travel out of your way to the bank with a thick folder full of paperwork and documents hoping you have everything that you need. Next, you’re subjected to an hour long application full of strenuous and pedantic questions. As the meeting ends, the advisor tells you he’s going to send off all of your documents to their head office for underwriting and you should receive confirmation in the post in 4 – 6 weeks. 6 weeks have passed by and you receive a letter saying unfortunately, we cannot accept you for a loan at this time.

Need we say any more?

Most P2P platforms have an automated online experience where you enter all of your information, upload your documents and receive an instant decision. How? Advanced technology and a service built to exceed customers expectations. This one is a no brainer.

3. Cheaper

Contrary to popular belief, many P2P platforms offer their customers interest rates that are even lower than those offered by the banks. Mainly, this applies to the platforms offering longer durations on their loans – those issuing loans with durations ranging from 1 – 3 months typically charge extremely high interest rates with huge default rates.

Looking at this from a psychological perspective is also worthwhile, since logically you can deduce that the financial awareness and responsibility of a borrower who takes out a €300 loan at 1,000% APR for one month, is most likely not as trustworthy as someone taking out a longer term commitment. Most financially aware borrowers would withdraw their application once seeing a huge rate of interest and reconsider if the short term loan is actually necessary for them.

Bringing all of this together, P2P platforms allow borrowers to see and interact with all of this information up front – such as by using tools offered by the platform to see how their payment will change depending on the duration and amount of their loan, letting them take full control.

4. Unique credit scoring

A win-win advantage for all parties involved is the unique credit scoring models offered by the P2P platforms. Typically, main stream banks use the standard credit referencing agencies as a sole source of information on a borrowers credit-worthiness due to the ease of access and cost efficiency. On the other hand, P2P platforms uses a proprietary credit modelling system that uses traditional data such as the credit referencing agencies, population registries, employment records and also non-traditional data like social media, national identity card data, how they interact with our website and 100’s of more data points.

For the borrowers, this creates a seamless experience that gives them a quick decision for a loan application which is often for a time-sensitive purpose. For investors, this gives them the opportunity to invest in loans with different credit ratings based on their own risk appetite. Most importantly, all of this builds trust and long lasting relationships with both borrowers and investors alike.

Remember, P2P is person-to-person, so your investments are going to real people and boosting the societal value of the sharing economy in finance.

Source: Bondora.com


Enjoy this blog? Please spread the word :)