Mentos? No, Mintos.
For the short time being, Mintos has become a household name in the P2P loan marketplace. I will spare the introduction as you probably already know what they do or if you don’t there is plenty of information already. The business model is quite simple. The innovative part is the exposure of that market to the mom and pop investors. This is all possible due to the technology advancement and change of people’s mindset to participate in this market.
How did i find interest rates confusing at the start?
The interface of the platform is quite lean so you quickly find out what you are looking for. The search is also very powerful. One of the most important pieces of information on a single loan is the interest rate. We are all here for that, right? However, i found the interest rate a bit confusing and think that it is fair to bring in some clarification for new investors. Strangely, Mintos is quite open and transparent but there is a lack of information specifically on that topic especially with examples.
My way of thinking is like this:
If i invest 1000E in a 12 month 10% loan i would expect to have 1100E at the and of the year.
That’s how traditional banking works but not Mintos (and probably the other similar platforms).
Interest rates seem lower than advertised. Consider this loan:
It is a 800E loan for ~5 months carrying 9.5% interest. I would expect to get 9.5% * 800 * 153/360 ~ 32E interest for the 5 months and few days if i were to buy the whole loan. That’s the formula that Mintos uses actually. 153 is 5 months and 3 days remaining to the end and the calculation is a rough one.
Looking at the payment schedule, it didn’t look like that:
If you add up all the interest, it comes to ~ 18E! Ouch. So i was confused. If i were to buy the 800E loan i would get 18 bucks and that seemes low compared to the promised 9.5% annually. So i contacted support. I must say support is absolutely top notch and after a few emails i started to grasp the idea.
So why this discrepancy in what i expected and what i saw in terms of interest rates?
The way Mintos is different than banking, is in paying out your investment (a.k.a. deposit in banking terms) month by month and banks hold your deposit until the end period. Let’s look at an example:
With traditional banking if you put up 1000E in a 5% 1 year deposit, you will get 1050E at the end of the period. However, you wont be able to have your money until the end. None of it. And that’t the huge difference. With Mintos you get repaid principal and interest every month until the period is over.
Your payday will look like that in both scenarios (1000E , 1 year, 5%):
Month 1 ~ 85E
Month 2 ~ 85E
- Traditional Bank
Month 1 – 0E
Month 2 – 0E
Month 12 – 1050E
What makes the huge difference here is the time value of money. With Mintos you get part of your investment back every month and with banks you don’t. With banks you wait for the end to get even a single penny out. So every month you get 85 bucks in your pocket back that you can invest in other loans. If you don’t do that, your money will still earn the promised interest BUT now you have less money in the game and you earn interest only on them. So after a month you will earn interest not on 1000E but on ~ 917E (principal of 83.33E and 1-2E interest repaid).
The big question is how you get the advertised interest rate with Mintos?
Answer is simple – you have to constantly reinvest everything that you get back in new loans with comparable terms. That has a few implications:
- You have to use the auto invest or otherwise you would be overwhelmed to reinvest every time you get a payback. If you have many loans schedule may be very erratic
- The first point implies you will probably have to stay away from the secondary market as the auto invest is not available there. So you will miss higher rates (at least now the situation is like that). Of course, you can do it on your own, but you would be overwhelmed as i said
- If you want to get high returns you will have to embrace longer term loans. Reinvest monthly paybacks in same term loans, remember? The longer the loan the better interest rate.
- When you decide to cash out and exit the platform, you will realize poor returns in your last period (be it 3 months, 6 months etc). This is very important so lets look at an example: if you invest only in 12m, 10% loans and reinvest everything you get for 5 years, you will get 10% interest for 5 years. Let’s say that you decide that the 6th year is your last. So you stop reinvesting. Month by month Mintos will repay part of your investment so every next month, you get more money in your pocket and less invested. And you earn money only on the invested part. Toward the end of the 6th year, you will be earning very few money on your whole capital (although still 10% on the money invested). That’s fair and how it works, but i don’t think many people realize it and may be a bit disappointed when that happens
When you decide to exit the platform, you may migrate from longer term loans to shorter term so that you employ all your capital to work till the end. That’s key concept – employ all capital to work at any time. However, short term loans bear less interest than longer ones. Still i believe that is the way to go. If you do 1 year loans and decide to exit at the end of the year, reinvest all paybacks in shorter and shorter loans so that final big payday matches your deadline. Once again, the less capital on the sidelines, the better.
I hope that brings some clarification to a topic that i personally found a bit confusing at the start. I might be not 100% punctual with this blog post. The intention is to shed some light in how things work generally so excuse me for any little miscalculations.