The most profitable way to exit Bondora

It’s a strange thing to think about. Why should you even consider how you are going to exit something you may have only recently started investing in? For any investment, it’s best to have a forward looking view and a plan in place from the day you start your journey, including your goals and what you will do once you reach them.

Euro image - Bondora

Liquidity compared to other asset classes

If you compare Peer-to-Peer lending as an asset class to stocks and shares, a fundamental difference is the liquidity. While stocks are significantly more volatile compared to P2P, it’s likely that most of the time you will be able sell your holdings either instantly or within a couple of weeks depending on the broker you are using.

A good example to use for comparison is real estate – If you have a property that you are renting out and receiving a monthly cash flow from, you may decide one day that you want to sell it. To do this, you have to list your property for sale (most likely through an agent), find a buyer, agree on a sale price, complete the legal work and finalize the deal. While P2P is much simpler than this and with less parties involved, the common denominator is to find a buyer (only when you liquidate your investment portfolio before maturity).

Selling loans before maturity

If you choose to liquidate your Bondora portfolio before maturity, the speed of this is dependent on investor demand on the secondary market. At this point, it’s important to note that selling your loans can result in a loss of the original principal, as the secondary market typically does not provide a high enough premium for current loans to compensate for the non-performing part of the portfolio. Therefore, we advise to proceed with caution and not to try and sell everything at once if you see a percentage of your portfolio is in default. We have seen many instances where an investor has quickly sold the performing part of their portfolio (and in some cases at a discount) and is left with only the loans in recovery, permanently damaging their net return.

P2P lending is a long term investment, meaning that you should take a view of investing your funds for at least a 5 year period. When selling your loans on the secondary market, it is highly likely that this will result in reduced returns or even worse, losses. Why? Because you are losing out on the monthly interest you would have received until maturity on each loan, not to mention if you sell a loan at a discount. To avoid this and to maximize your returns when liquidating your portfolio, try pausing your reinvestments and hold the loans until maturity, taking cash out as the loans are paid back to you on a monthly basis.

How quickly can I sell my loans?

The speed of the sales process depends on the market demand. In general, current loans are more liquid and will usually be sold within a day if sold at par value or a slight premium. Delinquent loans may take more time or the sale can be unsuccessful. As soon as another investor has purchased your loan, you will receive the funds directly to your Bondora account.

Dream house image - Bondora

Is it worth it?

Liquidity aside, there are many other options you should take in to account when investing in different asset classes. To draw upon the two mentioned above, stocks and shares are heavily influenced by factors such as politics, financial performance, competitors, war, regulation and much more. For example, in the year of the financial crisis in 2008, the FTSE 100 finished the year 31% lower. If you are trying to make short term gains and not hold your shares for a long period, you will need to invest a significant amount of your own time to dedicate to research.

In Bondora’s native Estonia, house prices plummeted by a huge 30.5% in 2009. In 2008 and 2009, many people across the world who purchased properties were forced in to negative equity (owing more on your mortgage than the value of your house) and lost their homes.

This is not to say that you should stay away from these fantastic asset classes and invest everything in P2P, it’s to reinforce the point that to grow your wealth you must take a long term view and most importantly “diversify and conquer”.

The most profitable way?

So, the most profitable way to exit Bondora is firstly to hold your loans until maturity, pause your reinvestments and withdraw the cash flow as you receive it on a monthly basis or if you need to exit earlier than this, ensure you sell your loans at a par or premium.