What are P2P lending?
P2P initially has nothing to do with credit and reflects a concept of the economy. It represents that something happens from person to person, i.e. a deal between these two people. P2P loans are therefore understood to be loans that are granted as private loans from one individual to another.
The peculiarity here is that there is no bank or other financial institution as an intermediary. The advantage is that there is no bureaucratic effort and high bank fees.
These loans are often taken out over the Internet on so-called P2P platforms or marketplaces. More about the marketplaces in the text.
Return comes from risk!
As an investor, you can get very high returns with P2P loans. However, you shouldn’t overdo it! On P2P platforms, borrowers usually take out a loan who would not get any or only a very expensive one from the bank, or who come from countries that have a different banking and interest structure.
We therefore do not recommend more than 2– 10 % to invest your invested capital in this asset class.
The function of the P2P marketplaces
The role of P2P marketplaces and platforms is completely different from banks that approve a loan (or not). Banks usually use customer deposits, such as money in savings books, call money accounts or fixed-term deposit accounts, and give this money to borrowers.
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The P2P platforms, on the other hand, do not act as a bank or bank-like, they do not grant or reject loans. The platforms serve more as a marketplace where investors and potential borrowers meet. So you bring supply and demand together.
On some platforms, so-called credit intermediaries act in place of the borrowers. These institutions, as the name suggests, mediate loans between the borrower and the supply side on the platform.
The tasks of the platforms are still the credit rating of the borrowers or credit intermediaries on the platform. Often the borrowers or intermediaries are in risk classes z. B. from 1 to 10 or A to E. This classification can be used to assess the potential risk that is taken with the investment.
The higher the risk, the higher the return! This means that a loan with a good credit rating brings less interest than an investment in a loan with a bad credit rating. Lenders want to be rewarded for taking a higher risk.
Benefits of P2P lending
- Individuals can invest in loans
- Investing with small amounts (with Mintos e.g. from 10 €)
- Attractive interest rates
- Borrowers can take out a loan if the bank declines them
- Risk diversification by investing in different risk classes and credit types
Risks of P2P lending
Failure risk
P2P loans are among the more risky loans. It can happen (and has happened on most platforms) that a loan has not been repaid. This can have different reasons depending on the platform. On the one hand, the borrower can no longer raise the money and becomes insolvent. On the other hand, the credit intermediary who is active on the platform may experience payment difficulties.
To counteract these risks, the platforms have introduced the ratings mentioned above so that you can see at the beginning how risky an investment is. But be aware that investments in loans with good credit ratings can also fail!
In addition, some platforms that work with intermediaries as intermediaries offer a so-called buyback guarantee. This means that the intermediary steps in should the borrower no longer be able to service his loan.
But even then, you are not 100% protected from failure. If the credit broker gets into financial difficulties, payment defaults can also occur.
wrong credit rating
When assessing the creditworthiness and risk classification of the respective platform of borrowers and intermediaries, you should be careful and not trust them blindly. As already mentioned, the platforms are not registered financial institutions and are not subject to the risk management of the European or American standard. In addition, the platforms are still very young and have little experience with credit rating.
It may well be that borrowers and intermediaries can be found on the platform who had a great rating of e.g. B. had A, but were rated again today and only got a D.
It may be that seemingly safe investments are riskier in a few months than at the beginning!
Bankruptcy of the P2P marketplace
In addition to the bankruptcy of a borrower or broker, it can also happen that a P2P platform goes bankrupt. Normally, the platforms have certain security mechanisms so that such a case does not occur. Or that at least the payments to the lenders will continue should the case arise.
Since the platforms are still relatively young, no bankruptcy case has yet occurred. How the bankruptcy behaves in reality, however, we will probably only see when the time comes. In order to counteract this risk, it makes sense not only to invest in P2P loans on one platform, but to spread them across several platforms.
P2P platforms
There are now a number of P2P platforms where you can invest in P2P loans. In the following you will find a small list of some platforms:
The list is of course not complete and is only intended to name a few platforms. I would now like to briefly introduce you to the two largest P2P platforms.
In order to maintain transparency, I would like to point out that I am invested on both platforms myself. You can find out more in my portfolio or my depot updates.
Bondora
The Bondora platform offers the opportunity to invest in loans from 3 countries. These include Estonia, Finland and Spain. In addition, Bondora consists of 2 parts, so to speak:
- Bondora Go & Grow
- Bondora Portfolio
At Bondora Go & Grow it is an autoinvest option in which you can automatically invest your money in personal loans. There are no fees for this function! With this investment approach, however, you have no control over which loans your money is invested in. Bondora takes care of the investment in the loans itself.
This investment option was created for investors who have not dealt so intensively with P2P lending, but still want to participate in it.
The return on this Go & Grow feature comes with an interest rate of 6,75 % p. a. Applied. It is important to know that Bondora does not guarantee this interest rate. It is only the target interest rate for this type of investment. The money is available very promptly and is therefore liquid! You only pay one euro for the payout.
Bondora Portfolio however, takes a different approach. There is the Portfolio Manager and the Portfolio Pro.
At the beginning of the portfolio manager you can record how much risk is okay for you. In addition, you have to specify your start-up capital, your monthly payments and the investment period. If you are satisfied with the expected turnover, you can start and Bondora will do the rest for you.
The Portfolio Pro, on the other hand, is aimed at P2P investors who like to set investment priorities themselves. You can choose which countries you want to invest in loans, which risk classes they should have and the term of the loans. You can also enter your portfolio limit and your desired interest range.
Your influence on the investments will be higher.
Mintos
The Mintos platform offers you the opportunity to invest in loans from over 30 countries. You can also invest in different currencies and different types of credit. The types of credit are for example:
- Consumer credit
- Mortgages
- Autocredit
- Agricultural Loans
- Short-term loans
Mintos is also divided into 2 areas. This includes Mintos Invest & Access and the Mintos primary and secondary market.
Invest & Access works very similar to Bondora Go & Grow. Similar to Bondora Go & Grow, the platform itself invests the money invested in a portfolio and is free of charge. At the beginning of the investment, Mintos Invest & Access shows an average interest rate, which is intended as a rough guide. The minimum investment is € 500.
Here, too, as an investor, you can get your money at short notice. However, 2 requirements must be met for this. On the one hand, it must not be in defaulting loans. On the other hand, buyers have to be found for the corresponding loan shares.
Alternatively, you can manually or with the help of the Auto-Invest invest in P2P lending. With Auto-Invest, similar to the Portfolio Pro from Bondora, you can determine the criteria for the loan selection yourself. These include, for example:
- running time
- Interest margin
- countries
- Credit type
- Buyback guarantee
In addition, there is the size of your loan portfolio in euros. After successful configuration, your available money will automatically be invested in loans with your desired parameters.
With manual investing, however, you have to manually select each loan. The criteria by which you can proceed are identical to the criteria of the Auto-Invest.
Here you come to Mintos* & Bondora*
Conclusion
I hope that with this blog post on P2P lending I was able to bring you closer to the matter. P2P lending can be a very exciting area if you are aware of the risk and want to take it. As already mentioned, we advise you to invest a maximum of 2 – 10% of your invested capital in this asset class.
Disclaimer
The content of this page does not constitute investment advice. I act as a private investor. Investing in the stock exchange can result in a total loss of the capital invested!
* This is an affiliate link. There are no costs for one click. When buying a product, the regular costs of the provider arise.
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