What is a Risk Tag and Why Does it Matter?
A risk tag is the risk that a lender or investor will rely on which correlates to a borrower’s commitment to return the capital and the interest at the end of the agreed investment period. The higher the risk tag, the higher the expected return for the issuer of the investment.
This is probably one of the most important concepts about lending or investing because it can dictate whether or not a loan will be funded. It is a trade-off for the investor, because he or she is going to take risk with his or her money.
When participating in P2P platforms like Blend PH, it is an expectation for both borrowers and lenders to possess a full understanding of this term.
How we apply risk tags
At Blend PH, we want to help lenders make an informed decision by providing them with useful information about the borrower, particularly their credit standing or through their risk tag. The easiest way to measure this is to look at the loan applicant’s source of income, employment history, age, civil status, and number of dependents, among other personal information. This isn’t always fool-proof but it is the best way to calculate someone’s “worthiness” for a loan approval.
Like banks, different P2P marketplaces have different systems of rating borrowers, but really, the point of it all is to balance the risk of default for the investor by providing them with a higher return of investment (ROI).
To explain risk tagging further, see the breakdown and examples below:
Risk Tag A
People who fall under this risk tag category has these characteristics:
- People with existing credit history
- People without history of defaulting or late payments
- People with good credit score
When you invest in a loan under Risk Tag A, you can generate somewhere around 14% ROI. This is a low risk investment with a low probability of default.
Risk Tag B
Borrowers who fall under this risk category has the following characteristics:
- People with existing credit history
- People who incurred defaults or late payments that have already been settled
- People with an average credit score
Investing on loans under Risk Tag B could get you up to 21% ROI. These medium risk investments are best for lenders who are still trying to figure out if they’re conservative or aggressive when it comes to investing. It has an average probability of default but comes with a higher return.
Risk Tag C
Those who fall under this category can belong to the following:
- People who have no existing credit history or completely new to credit
- Those with existing credit history and unsettled default
This one has the highest risk of default but also produces the highest ROI of up to 32%. Investing on loans under Risk Tag C is ideal for people who can tolerate high-risk investments.
Every borrower on our platform is categorized according to these three risk tags along with other essential information that can help make investors or lenders make a sound, tolerable decision based on their personal preferences. Blend PH lenders can have full control over the money they own, and can choose to only fund loans at the risk level that they think would be acceptable under their own terms.
For example, if you feel like you absolutely cannot afford to lose money on a default or on a late payment, you can choose to invest on a lower risk investment on the platform. Alternatively, if you have more money to invest, you can spread the amount across loans under various risk tags to ensure that you can minimize risk level and obtain a stable ROI. This could mean spreading your PHP 15,000 investment in increments of PHP 5,000 on a salary loan, a franchise loan, a seafarer loan, and so on. Each would have their corresponding loan term and interest rate that you can study and analyze.
Our growing platform is already there available at your perusal, with all the information you might need right at your fingertips. Our team is also just a phone call away. In the end, P2P investing is all about making informed decisions. As stated in our Terms & Conditions, “An Investor must form his own opinion regarding the creditworthiness of a borrower, and undertake his own research, analysis, and assessment of each borrower for each loan and, where appropriate, seek his own independent financial advice.”