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Low Volatility Returns vs High Returns, Which Is Better?

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As unsecured online lenders lose their luster, investors are looking for more reliable ways to capitalize on online lending. Whether a financier, lender, asset holder, or borrower, cosigning is a better way to lend.

The past two years of online lending can be summed up as the “rise and fall of speculated returns.” According to TechCrunch, The U.S. consumer lending market is a $3.5 trillion business, and online lenders originated just $10 billion in 2015. Seeing the opportunity, venture capital firms and institutional investors started investing in online lenders. Online lending startups have raised a total of $12.6 billion across 463 deals since 2011, according PitchBook. Online lenders were able to convince investors to provide them money to lend out based on the presumption that new algorithms and machine learning can determine who is most likely to pay off a loan, even if their credit score was a higher risk.

This “high yield” portfolio of high yield loans has become a rocky road for everyone. The computers may not able to accurately predict who could pay off the loans, and higher than expected default rates can result in insufficient interest income or repayment of principal to pay any returns to investors.

Even as bundles of consumer loans are being securitized and sold to large investors, the wave of defaults have caused certain “triggers” to be breached where the online lender is no longer able to issue more consumer loans. They have to use all their money to pay off the investors. In some cases, lenders can continue to issue new loans, but only by raising the amount of interest they charge for each loan. They must raise the standards a potential borrower must meet in order get approval for a loan, thereby cannibalizing their own market.

The classic example is CircleBack Lending, which shut down due to higher than expected defaults. They lost 13.5% on hundreds of millions of dollars in unsecured debt. Loanio, the previous online lending company started by the same founder, also closed due to higher than anticipated default rates.

Does this make online lending a passing fad? Are there still opportunities to make solid returns on what many say is the lending of the future?

Online Cosigning is a Solution for Everyone

Cosigning a loan has been in practice for centuries. It can be used in cases where a borrower has a poor credit history, a thin credit history, or no borrowing history at all. A potential borrower can get a loan even with a credit score of 580-660, or no credit score at all. They can have a loan cosigned by someone with a good credit, and get approved.

Cosigning offers several advantages that negate some of the risks of most personal loans:

  1. Greater Customer Loyalty. When someone takes out an unsecured loan, there is no collateral, just a promise to the bank. A borrower risks losing credit score, and the ability to raise debt in the future. When a loan is cosigned, the borrower is no longer obligated to the bank, but to the cosigner. A cosigner can be an army buddy, a best friend, a trusted co-worker, a sibling, or a parent. This type of personal loan is backed by the trust between the borrower and the cosigner.
  2. Better prospects of collecting the total interest on the loan. In the case of lending to borrowers with higher credit scores, the risk is that they have the means to repay the loan faster than anticipated, resulting in unearned interest income. In cosigning, the borrower has a lower credit score, and is more likely to pay the loan over the full time given.
  3. Higher returns for your risk. With cosigning, you can issue a loan to someone with a below average credit score and ask for higher interest rate to cover the risk. However, the loan is backed by someone with a higher credit score, who serves as hedge.
  4. Greater confidence in your return being realized. Cosigning, with the additional layer of human security, and a higher credit score as backup, leads to lower default rates than other types of unsecured lending. This translates to a higher likelihood of reaping the full return on your investment, and a less danger of bond triggers being breached.
  5. Less risk of default. While a personal loan is unsecured, cosigning adds an additional layer of security. Upon default of a loan, the cosigner assumes liability for the debt. The right online lenders will alert a cosigner at every stage in the debt, and enable them to make payments to keep the debt in good standing without demanding additional fees or paperwork.

Backed, Inc. is a pioneer of online lending. They offer the best in conversion rates, derived from user experience. Their underwiring model enables borrowers to get the best rate available while providing investors with the highest return on their investment relative to the risks. Backed, Inc. uses a unique servicing methodology where the cosigner is treated like a co-borrower, kept in the loop at every step.

Authors:

Before Backed, Gilad Woltsovitch co-founded iAlbums, a semantic curation engine for media players in 2010 where he served as the company’s CEO from 2011-2014. In 2013, Gilad also served as the entrepreneur in residence for Cyhawk Ventures and joined the Ethereum project, establishing the Israeli Ethereum meet-up group. Gilad holds a Masters of Art Science and Bachelors in Sonology from the Royal Conservatory of The Netherlands in The Hague, University of Leiden.

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