We are happy to announce that Mogo loans without the buyback guarantee are now available on the Mintos marketplace. We are excited to bring to market yet another loan product that will allow investors to further diversify risk. With a total of EUR 130 million in loans originated since the company was founded in 2012, Mogo is the largest non-bank car loan provider in the region, with operations in Estonia, Georgia, Latvia, Lithuania, and Poland.
Loans without the buyback guarantee is an opportunity for investors to earn potentially higher net returns. Moreover, by investing in loans without the buyback guarantee, investors will have full exposure to the underlying asset class of loans and will not have to rely on the financial strength of Mogo to provide the buyback guarantee.
Mogo will start with a limited number of loans originated in Latvia to test investor appetite. Given sufficient demand, the loan supply will be increased over time. Loans will be priced by Mogo according to its credit scoring model, which has been well refined in accordance with Mogo’s extensive experience in originating loans and debt recovery.
In our blog we have compiled answers to some questions investors might have.
Why invest in loans without the buyback guarantee?
Investing in loans without the buyback guarantee can potentially yield higher net returns. In general, loans without the buyback guarantee come with a higher interest rate than loans with the buyback guarantee — the difference is the estimated annualized bad debt rate. Furthermore, loans without the buyback guarantee provide an opportunity to get true exposure to the underlying loans as investors don’t have to rely on the buyback guarantee provided by the loan originator.
What net return can I expect?
The net return is a function of earned interest and bad debt. For a well-diversified portfolio, the net return can be calculated as gross interest rate less annualized bad debt rate.
What are the estimated bad debt rates for Mogo loans?
Bad debt is debt that is not collectible. A loan becomes “bad debt” when there is no longer a reasonable expectation of further payments. Remaining principal balance of the loans that become bad debt will be deducted from your account balance.
The average bad debt rate across the Mogo loan portfolio has historically been around 5%. However, the bad debt rate of new loan originations is expected to average around 2%, due to improved credit scoring and debt collection.
The estimated bad debt rates are provided according to Mogo’s credit scoring model, based on past performance. Estimated bad debt rates are not a guarantee of the actual bad debt you will experience. Investors should spread their investments across many loans to reduce the impact of any single default.
Estimated bad debt rates are annualized so they can be used by investors to help calculate what their expected annual return will be. Diversified investors can calculate their expected annual return by simply deducting the bad debt rate from gross interest rate.
What happens if a loan is late?
Late payments are a natural component of investing in loans. If the borrower misses (or only partially pays) a monthly instalment, Mogo makes significant efforts to contact the borrower, collect outstanding payments, and bring the loan back to current status. Mogo has a robust internal debt collection team and works with several external collection agencies where necessary.
Once loans become late, Mogo attempts to contact borrowers via email, SMS, phone, and letter to collect any past due payments. Depending on the circumstances, Mogo works with the borrowers to arrange for payment to be made immediately, structure a new payment plan, or take other appropriate action, all in an attempt to prevent the loan status from deteriorating further.
If the borrower becomes 35 days in arrears, or otherwise if Mogo believes there is a serious risk that the borrower will not be able to fully repay the loan, the loan may be placed into “Default”. This means that the loan will be terminated and the outstanding balance of the loan will become immediately due and payable.
Mogo will act with due care and in a fair and proportionate manner to achieve maximum recovery for all affected investors. In doing so, Mogo will, among other things, aim to renew the loan, repossess and realize collateral, sell the debt to a third party, or pursue further legal action. Mogo will pay to investors, in their proportionate share, any funds successfully recovered less costs incurred.
When a loan is placed in “Default”, the loan will be re-assigned to Mogo. Assignment enables Mogo to “step into the shoes” of the investors, which makes it easier for Mogo to negotiate with the borrower and to take steps to recover the loan.
Where can I see ongoing collection activities on late loans?
As an investor, you are regularly updated with any servicing and collection activity related to your loans via the Debt Collection page in your account. To see the Debt Collection page, go to My Investments and click on the ID of a particular loan.
Can I sell a loan that is in “Default” status on the Secondary Market?
Yes, you can place the loan that is in “Default” status on the Secondary Market. However, please keep in mind that the demand for such loans might be limited.
What happens when a loan is charged off to “Bad Debt”?
A loan becomes “Bad Debt” when there is no longer a reasonable expectation of further payments. A loan is charged off to bad debt typically when a loan is 140 days past due.
Mogo may sell charged off loans to a third party. In the event that a charged off loan is sold to a third party or funds are recovered on a previously charged off loan, investors will receive a pro rata share of the sales proceeds or recovery amount, respectively, less any fees. In general, recoveries on previously charged off loans are infrequent.
What is the difference between a loan that is in “Default” and a loan that is “Bad Debt”?
Loans that are in “Default” are loans for which borrowers have failed to make payments for an extended period of time. In general, a loan enters default status when it is 30+ days past due.
A loan becomes “Bad Debt” when there is no longer a reasonable expectation of further payments. A loan is charged off to bad debt typically when a loan is 140 days past due (i.e. 110 days after the default status is reached) and there is no reasonable expectation of sufficient payment to prevent the charge off. In certain circumstances, loans may be charged off at an earlier or later date.
A loan that is in “Default” will still appear in your loans, while a loan that is “Bad Debt” will appear as charged off, and the remaining principal balance of the loan will be deducted from your account balance.
Take the opportunity and invest in Mogo loans without the buyback guarantee.