Investing for beginners — How to reduce potential losses and achieve long-term stability

In brief:

• Investing in loans is a moderate-risk investment with potential returns of 6 to 12 per cent per year — higher than bank deposits, lower than the long-term return on equities.

• The main risks are borrower insolvency, platform risk, liquidity risk, and the impact of the economic cycle.

• The key investment risk management tools are diversification across many loans, choosing high-quality loans, and using a licensed platform.

In recent years, more and more people have started taking an interest in how to put their money to work, and one such opportunity is investing in loans. The investment process through platforms is relatively simple, and the potential returns on offer are attractive. However, one of the most important questions on the minds of beginners and experienced investors alike is: is investing in loans safe?

Before we get into risk analysis, it is important to understand that in today's regulated Latvian market, investing in loans is carried out in practice through loan-backed securities — financial instruments issued by investment brokerage firms licensed by the Bank of Latvia. This means the investor purchases a regulated financial instrument whose return is linked to a loan portfolio.

To make thoughtful decisions, it is essential to understand what the main investment risks are and to know how to manage them.

What investing in loans means

Investing in loans means that as an investor you purchase loan-backed securities whose returns are linked to the payments made by borrowers. Unlike traditional bank deposits, here you take on a share of the credit risk.

This type of investment is often perceived as a middle ground between low risk investments and higher-yielding opportunities, making it an interesting choice for investors who are looking for a balance between safety and an attractive return. While not the same as fully secured investments like government-guaranteed deposits, loan-backed securities can play a useful role alongside other safe investments in a balanced portfolio.

Investing in loans is typically characterised by:

• A moderate level of risk.

• A relatively stable cash flow.

• Smaller fluctuations than in the stock market.

• Specific credit risks.

It can be a good choice for investors who appreciate regular passive income and are willing to accept moderate risk. Investing for beginners is often recommended in this category, as loan-backed securities are easier to understand than the stock market.

The main risks of loan investments

Before investing, it is important to understand the main investment risks in this segment. Conscientious risk assessment is the first step towards thoughtful investing.

1. Borrower insolvency

One of the most significant risks in investing in loans is that the borrower may be unable to repay the loan. This can happen due to economic hardship, unemployment or other reasons.

To reduce this risk, diversification — spreading investments across many loans — is essential. The more loans in the portfolio, the smaller the impact a single borrower's problems will have.

2. Loan originator risk

On many platforms, there is a loan originator standing between the investor and the borrower — a company that directly issues the loan to the end client. If this company encounters financial difficulties, it can affect payments to investors.

That is why it is essential to evaluate the quality, financial stability and operating history of loan originators. On licensed platforms, this information is openly available and is regularly monitored.

3. Platform risk

When investing through a platform, you also depend on its operation. If the platform encounters problems or ceases operations, recovering funds can become complicated.

In terms of safety, the key factors are regulation, transparency and investor protection mechanisms. Platforms licensed by the Bank of Latvia are subject to stricter requirements regarding the segregation of client funds, reporting and management, which significantly reduces platform risk.

4. Liquidity risk

Unlike stocks or ETFs, investing in loans does not always provide immediate access to funds. If you need to withdraw money quickly, this can be challenging.

Some platforms offer a secondary market where investments can be sold before the end of the term, but its operation can be limited, especially during economic shocks.

5. Impact of the economic cycle

During economic downturns, the number of late payments and insolvency cases tends to increase. This means that investing in loans is not entirely insulated from macroeconomic processes.

How to manage loan investment risks

In the world of investing, smart risk management is a key prerequisite for long-term success. Let us look at practical tips that will help you reduce potential losses and strengthen the safety of your investments in the long run — useful whether you are wondering if loans are a good investment for your portfolio or simply looking for ways on how to invest safely.

Spread your money across multiple loans

Sensible risk management starts with diversification. If you invest in only a few loans, problems with a single borrower can significantly affect your entire portfolio. By contrast, splitting capital across dozens or even hundreds of loans makes the impact of any single insolvency on the overall portfolio minimal. This, however, does not eliminate market, economic cycle or platform risks, which remain regardless of how diversified your portfolio is.

In practical terms, this means:

• Not investing large sums in a single loan.

• Using automated investment tools that spread the investment.

• Building the portfolio gradually rather than investing everything in a single day.

Diversify across the TWINO product range

Diversification is not only about many loans — it is also about different product types, terms and loan originators. On the TWINO platform, this is possible by combining different solutions.

• Loan-backed securities with different terms — short-term and long-term instruments.

• The FLEXI liquidity solution — an investment that can be withdrawn at any time.

• Instruments from different loan originators — operating in different geographic areas and lending segments.

This internal diversification helps reduce risk while keeping all the information on a single regulated platform.

Choose high-quality loans

Not all loans are equally safe. Loan quality is often more important than the interest rate on offer. A higher yield often also means a higher level of risk.

What to look at when selecting loans:

• The loan originator's rating, which is shaped by length of operation in the market, reputation and payment discipline. Choose a platform that provides such information.

• A reasonable interest rate — it should be neither too high nor too low compared with market averages.

Understand how the buyback guarantee works

Many platforms offer a buyback guarantee — a mechanism whereby, if the borrower fails to make payments within a specified period, the loan originator buys the loan back from the investor. This is a useful additional safety mechanism that helps reduce credit risk, contributing to a more secured investments approach within your overall strategy.

At the same time, it is important to understand how this mechanism works:

• The effectiveness of the buyback guarantee depends on the loan originator's financial stability.

• This guarantee is not the same as the state-guaranteed deposit protection in banks.

• It should be regarded as an additional, rather than a replacement, layer of safety.

Ideally, the buyback guarantee works in conjunction with the platform's regulated status and investor protection mechanisms. TWINO clients have access to both a buyback guarantee on specific products and additional investor protection of up to €20,000, as TWINO is an investment brokerage firm licensed by the Bank of Latvia.

Do not invest all your capital in a single asset class

Although investing in loans can provide stable passive income, it should not be your only investment strategy.

A balanced portfolio typically includes:

• Equities or ETFs for long-term growth.

• More conservative instruments for stability, including various fixed income investments.

• Loan-backed securities as an income-generating component.

This approach helps offset the fluctuations of different asset classes and improves the overall stability of the portfolio.

What is the real return on loan investments?

As with any other type of investment, the main motivating factor when investing in loans is the expected return. In this case, it is potentially higher than for traditional savings options. However, when projecting your future income, it is important to understand that the advertised return may differ from what you actually receive.

Historical return, 6 to 12 per cent per year

Many investment platforms offer loan-backed securities with interest rates in this range, which makes them a more attractive profit opportunity compared with bank deposits. However, these figures are usually gross, before potential losses and additional costs are taken into account. Returns are not guaranteed and depend on many factors.

Why the Actual Return May Differ

In practice, investors face several factors that affect the final result:

• Late payments — interest continues to accrue, but cash flow becomes irregular.

• Unrecovered loans — some investments may not be recovered in full.

• Cash idle time — it is not always possible to immediately reinvest repaid capital.

• Commissions and taxes — reduce the net return.

Transparent platforms, including TWINO, show both gross and net results in the client account, allowing the investor to accurately track the actual return.

Investing in loans compared with other investments

To better understand how safe investing in loans is, a comparison with other popular types of investments is helpful.

Bank deposit

Bank deposits are considered one of the safest forms of investment. Funds are protected by the state deposit guarantee fund (up to €100,000). Returns are low, often close to or below inflation. Suitable for preserving capital rather than actively growing it.

Third-pillar pension

The third-pillar pension is a long-term savings option with low risk and tax advantages. However, access to funds is restricted until retirement age, which reduces flexibility. Suitable for those seeking more stable retirement years.

ETF equity funds

An ETF (Exchange-Traded Fund) is a stock exchange-traded fund that combines the shares of many companies in a single investment. Higher risk, exposed to short-term fluctuations, but high liquidity and potentially higher long-term returns. Suitable for people who want to grow capital in the broader market.

Loan-backed securities

Loan-backed securities occupy a middle ground between safety and yield. Relatively stable income (usually 6 to 12 per cent per year), moderate risk level, moderate liquidity (depending on the product). Suitable for building passive incomeand diversifying the portfolio. On licensed platforms, investor protection mechanisms provide additional safety.

Summary

Investing in loans is a moderate-risk investment with a potentially attractive return. Used thoughtfully, it can become a valuable part of a balanced portfolio and provide stable passive income. However, no investment carries a 100 per cent guarantee, and it is important for the investor to be aware of both the opportunities and the risks.

To improve the safety of your investments:

• Choose reliable and regulated platforms with accessible investor protection mechanisms.

• Build a realistic return forecast that takes the impact of risks into account.

• Spread your investment across multiple loans, products and terms.

• Combine it with other types of investments for a balanced portfolio.

If the option of investing in loans has interested you and you want to learn more, take a look at the FAQ and Resources sections.

Email: [email protected]
Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is for informational purposes and is not individual investment advice.