What is the Loan Score Class?
The loan score class is iuvo’s credit risk rating mark. It helps you determine the probability of a particular loan going default. Typically, each originator measures credit risk using its framework. However, for centralization, we had to develop a way to make credits from different originators comparable within iuvo. This is why we implemented the loan risk class – our own rating system.
The credit ratings at iuvo are:
Class A: 0 – 2% default probability
Class B: 2 – 10% default probability
Class C: 10 – 18% default probability
Class D: 18 – 25% default probability
Class E: 25 – 35% default probability
Class HR: above 35% default probability
How does the score class affect my profit?
People have a natural inclination to seek stability and avoid risk. With investments, however, the risk isn’t a bad thing, as long as you’re smart and strategic about it. When investing in a high-risk asset, you should be aware of the possible losses versus the amount of profit you can make.
Taking risks pays off in the long run, or in our language: investing in lower score class loans should ultimately bring you bigger returns. Here’s how it looks:
Class A: 5.03% – 6.31% return
Class B: 6.07% – 7.21% return
Class C: 6.96% – 8.13% return
Class D: 7.87% – 9.05% return
Class E: 10% – 12.34% return
Class HR: 11.87% – 15.22 return
This data is based on loans from December 2017. It can vary slightly between months and periods, however, what’s important is the trend: annual returns grow in reverse proportion to the loan score class. To maintain a healthy risk level in your investment portfolio, always keep in mind both the default probability and the expected return rate, and try to find your perfect balance between the two.
I’m trying to build my own investment strategy. Should I only look at the score class?
It’s never a good idea to follow only one attribute of the assets you’re investing in. When it comes to P2P lending, you can enhance your strategy by monitoring both the loan score class and the borrower`s details.
Once logged in, go to the Primary market, and click on any loan’s ID – this will reveal the loan’s attributes. Check the Borrower and Collateral section. There you can see insightful data about each borrower’s profile. All the information in this section is provided by the loan originator and isn’t edited or altered by iuvo.
The borrower profile includes: sex, age, education, occupation, salary level, and partner’s salary level (unless the borrower is single/unmarried). Based on these details, as well as other factors (such as personal credit history) originators evaluate a borrower’s solvency, and thus – the credit default probability.
Due to confidentiality restraints, iuvo doesn’t have access to borrowers’ personal information such as name, ID number, and credit history.
How is the borrower`s profile connected to the loan score class?
By going through borrower profiles and considering their loans’ score class, you can narrow down your own criteria and start targeting a certain type of “borrower persona” in the platform. E.g., you could decide that a reliable borrower for you means someone within a certain age group, whose earnings exceed a certain amount, and who has a certain education level.
Before you design your final strategy, make sure to experiment a bit with different borrower profiles and loan score classes – this will help you assess what risk level works best for you
What if I fail in my judgment?
Don’t forget about the Buy-back guarantee! In case a loan goes default, the Buy-back guarantee covers the full unpaid principal for the remainder of the loan. Read more about it here: What is Buy-back guarantee and how to control your investment risk.