Hidden opportunity in longer-term loans

Market & Pricing

 In general, longer maturity of a loan is usually associated with higher risk; thus, some investors avoid investing into loans that have a duration of over 36 months. However, over 50% of the loans that came to Bondora marketplace this year had duration of over 36 months, so we decided to analyze if investors are not overlooking an attractive opportunity that is hidden in longer duration loans.

Loan durationLoan amount approved for the Market, €Loan amount approved for the Market, %Funded amount, €Funded amount, %
12 months1,300,140 €4.3%1,147,883 €7.0%
24 months4,225,880 €13.8%3,084,597 €18.9%
36 months5,721,963 €18.8%3,027,738 €18.6%
48 months4,967,983 €16.3%2,560,050 €15.7%
60 months14,300,592 €46.9%6,501,420 €39.8%

Timeframe: January 1, 2014 to October 14, 2014

As one can see from the table above, given the nature of loan demand there are plenty of opportunities for investors to invest into the loans with duration of over 36 months. Therefore, if longer duration loans provide sufficient returns, this might be one of the largest current opportunities overlooked by some of the investors. Let’s take a look at how longer duration loans performed so far:

Weighted interest rateDefault rateof seasoned loansRecoveryrate *Estimatednet return
12 months28.2%4.0%27.0%24.1%
24 months27.1%6.6%27.0%20.5%
36 months27.4%8.6%27.0%18.8%
48 months26.8%8.4%27.0%18.4%
60 months27.2%8.1%27.0%19.0%

Timeframe: January 1, 2009 to October 14, 2014

*The recovery rate is calculated based on the loans, which defaulted in 2013 and have had on average 12 months to recover.

As can be seen from the summary table above, the loans with the duration of over 36 months provided the return in excess of 18% despite a slightly higher default rates! Therefore, we suggest to take a closer look at the longer duration loans that come to the marketplace and set up Portfolio Managers to exploit this opportunity.