Crowdlending (also known as P2P lending) is an investment opportunity that is gaining more attention and popularity worldwide. Especially in Europe the sector is growing fast and has started to establish itself positively.
I will in this ultimate crowdlending guide uncover all the details about how it works, pros and cons, etc. from an investors perspective.
If you are new to crowdlending investment, then this article is a great place to start 🙂
Table of contents
In essence, it allows all kinds of investors (small to large) to lend money in a more direct way to borrowers and gain interest on a monthly basis.
How does Crowdlending work?
The crowdlending platforms match the borrower (from a loan originator) with the investors.
You will have access to very detailed info about the investment, the borrower, the loan originator itself, returns, risks, and creditworthiness.
You can, therefore, adjust according to your risk profile.
In most cases, especially short term loans, personal loans, and car loans, [highlight]the loan originator has already established the loan and approved the borrower.[/highlight]
Basically, the loan originator invites the investors on the platform to fund the loan and will give a share of the return (interest) for this.
As an investor, you don’t have to worry directly about a central bank influencing your returns (which happens with bank savings/debt) and you get a good insight into the investment.
Typically you can expect between 11-13% annually on average with some sort of security (buyback guarantee, property, etc.).
Eg. If you invest EUR 100, then you can expect to have 111 -113 EUR after one year.
Usually, you get the repayment as well as interests monthly automatic on your platform account.
This money can also be continuously reinvested (even automatically on the crowdlending platforms) and thereby increasing your return. You can also withdraw the money to your own bank account.
You can invest as little as 1 euro (usually € 10) and it’s pretty amazing. This allows everyone to start and invest.
No matter what amount you invest, you can also invest small amounts (like 10EUR) in each loan. Then you will have less invested in a single loan, minimize the risk and be more diversified.
I want to uncover more about benefits, the risks involved and the Crowdlending P2P market.
First, though, I will briefly introduce some of the platforms that are worth knowing 😊
European platforms to keep an eye on:
The biggest crowdlending platform in Europe with more than 175.000 investors worldwide. It’s my favorite platform with +13% in return. They also have a very active secondary market – meaning early exit is possible and liquidity is high.
European platform with some great investment opportunities. They offer great returns (up to +15%) and buyback guarantee. I’m very pleased with the platform.
Strong European lending company behind this platform. They have many positive investor experiences. They offer a good return (11-12%) and buyback guarantee.
They offer you up to +13% in return and the best buyback guarantees in the European market. I really like the platform and have built a good relationship with them.
One of the few multi-lender P2P platforms with very lucrative returns (12%-14%). It’s a small platform.
They offer short-term consumer loans with a 100% buyback guarantee. It’s a smaller crowdlending platform but has a positive reputation.
They offer +11-12% in return and 100% Buyback guarantees. It’s a healthy company behind the platform.
Benefits of Crowdlending
- Low or No fees – Many platforms only charge a small fee to the loan originator (which is passed on to the borrower), not the investor!
If the investor does get charged a fee, it’s not likely going to be greater than 1%, which is generally pretty low considering the 10%+ returns.
- Low barriers to entry – Everyone can join as you can invest right down to 1 EUR. You do not need a larger amount of money to start.
- Fast – Most of these sites are new fin-tech startups. This means they are digitally savvy and know how to create a simple, fast website/app for their users. It will rarely take more than a few seconds to have an investment approved. The platforms are always updated with the latest data.
More benefits… 🙂
- Simple and transparent – unlike banks, there is little paperwork, less hidden small print, no hidden fees, a normal transparent payment schedule. Most platforms have a whole page dedicated to their fees/how they make their money.
- Good rates – Investors (Lenders) can often average over 10% with low risk involved.
- Minimal risk – Loans are either secured against real estate or movables, or they have a 100% buyback guarantee!
- Privacy – most companies do not share the identity of the borrower and the investor with each other.
- Data – communication is in always encrypted, and personal/account information is secure.
- Regulation – now that they’ve been popular for several years, regulation has caught up to make things safe for investors.
- Diversification – it may seem although the risk is high for high-interest loans to poor credit lenders, this is reduced through diversification.
Many P2P platforms will offer automated diversification – so your money isn’t going to just one borrower – but split across many, and they will all have different backgrounds, locations, and profiles.
- Liquid – P2P loans can be liquidated into cash fairly quickly. There are secondary markets for some (not all) P2P platforms – for example, Mintos is very active. This allows investors for an early exit by selling their investment to another investor. Some platforms will also offer a buyback themselves such as Lenndy and PeerBerry, which both charge 5% loan fee for the buyback.
Who are the borrowers?
A borrower is any individual or business who wants to take out a loan.
The platforms I use are all from Europe and the same are the borrowers.
The loan originator will check the borrower. The P2P platforms all differ, but generally, the loan originator will verify three things: their identity, their risk profile, their credit history.
They do this usually by asking for bank statements, proof of address and income details.
In general, the loan will have a risk profile (rating) that reflects all aspects of the investment and this has also included an evaluation of the borrower.
Usually evaluated on a scale from A + to D:
A + to A- are low risk and really good.
B + to B- are medium risk or moderate risk.
C + to C- are a higher risk
D + and higher have a very high risk and are not recommended at all.
How the platform evaluates can vary and you need to look into it yourself. I invest from A + to C + but ensure that the loan has buyback guarantees and some good conditions.
Types of crowdlending loans
Generally, these are the core types of loans:
- Personal loans – these are often unsecured loans borrowed for any purpose, so make sure the loan originator offers you buyback guarantees. These are the most common type of loans.
- Specific loans – there are options for business owners to take on loans specifically for business purposes. Use some time to look into the investment.
- Collateral – Some loans can also be secured with collateral. This means that upon default, the asset would be put up for auction in order to pay back their investor.
The risks involved
What are the disadvantages then? It all seems very good, right? 🙂
Investments will always be associated with some risk and therefore it is important to take some precautions. Let’s take a look at this investment opportunity:
The default rate
The default rate, or likelihood of default, is usually a good measure of debt risk. In the case of crowdlending though, this isn’t the only factor.
When considering risk, you want to also measure if the platform can offer to buy back the loan, and if so at what rate/discounted loss.
If you can buy back the loan, then your biggest risk becomes the P2P platform itself going bust – not likely but this is still worth exploring before making an investment, especially with smaller platforms.
Additionally, you want to know if the loan is secured against assets that the borrower’s provided (the asset will be put up for auction if they default), as some may and some may not.
Lastly, you can check if there is some sort of loss-protection (buyback guarantees), whether it is guaranteed (or if it is just a non-guaranteed buffer with a strong success rate).
An example is Fast Invest where they buy back the loan automatically if it is 3 days late. That’s really good for you as an investor because your money will not be held back.
Make sure your money is not invested in a small area or a few countries.
Different countries and states have different laws and restrictions surrounding P2P finance – generally, though, it is becoming a feasible investment for most places in the developed world.
Some platforms restrict access to only investors from the country of the platform (i.e. RateSetter you have to be a UK resident), whilst some others are worldwide accessible (i.e. Mintos).
Geographical diversification means the borrowers receiving your invested money are from a wide range of cities, countries and even continents.
This helps reduce geographical risk – for example, natural disasters, or collapses of domestic economies.
Therefore, you will have to consider the geographical risk if you have investments only in a specific area.
Crowdlending platforms are extremely transparent. You can see the profile of the borrower and you know where your money is going – unlike when you deposit money into a savings account. The risk is extremely clear.
Banks on the other hand, as seen in 2008, have almost no transparency. They were selling each other Collateralised Debt Obligations which no one knew the contents of, they were lending depositors’ money without the assets to repay them.
P2P platforms are also very open about previous performance. On their own site, they will often denote things such as how much is being invested, the average returns, the market cap, how many people have defaulted, etc.
If the basic information is not clear on the website then I would not recommend you invest. As a minimum, you should be able to read overall static details about the platform.
Generally, though, crowdlending is considered legal. In Europe, there is a really positive development where it is recognized as a credible investment opportunity.
What does differ though, is the regulations in place. Different countries have different regulating bodies, who have different views on P2P.
For example in the UK, P2P investments don’t qualify for the FSCS scheme of up to £75,000 guarantees for savings (as they do with banks), but do enforce ways that lenders will be repaid by the platform if they go bust (although, you cannot rely on this by nature of limited companies going bust).
The culture that is often a result of the previous legality is also a factor in your P2P experience. For example, India has always had some precautions around decentralized forms of lending. Currently, despite it being perfectly legal for a few years now, there is still not much opportunity for investors because of the hesitation over this kind of lending.
The P2P market
The market size
In the month of April 2019, 800 million EUR (€) was funded to borrowers, and around 85 billion EUR has been funded overall in the history of the top 70+ crowdlending platforms.
The market is even larger than this when adding up all the smaller P2P platforms, too.
With such large monthly funding to borrowers, there is no shortage of investors for borrowers, and there is certainly no shortage of secondary market loan opportunities.
Growth factors and trends
Most countries are now accepting, and even encouraging P2P lending.
Australia, for example, has a regulatory sandbox system where companies can set up a company and operate without a license for the first 12 months.
Other countries such as Lithuania and Latvia are also encouraging of new fin-tech startups, with competitive corporation tax, cheap but skilled workers, startup visas and accelerator funds.
The push for fin-tech startups by many European countries is driving growth in the industry, which is to the benefit of consumers: competition for the best services and the best rates!
China was a massive part of crowdlending and used it fully to its benefits. In fact, with over $200bn in loans, it had the largest growth of any P2P lending market – larger than all other markets combined in 2018.
There was a lot of bad debt and reckless behavior leading to losses for investors. By 2018, China had introduced [highlight]very strict[/highlight] regulations, and over 300 companies pulled out of the market.
Transparency Market Research forecasts the growth of the P2P lending market at 48.2% CAGR (compound annual growth rate) until 2024.
With interest rates forecast to rise over the next three years in the UK(and with other countries planning the same), this can play into the hands of the P2P market.
A rise in interest rates reduces the number of loans taken out at banks because of the higher costs. Crowdlending platforms don’t have this problem. The interest rate is calculated mostly on risk instead.
The P2P lending market has grown vastly over the past few years, but the future looks even brighter with its ability to avoid economic pressures. More and more investors are aware of Crowdlending and joining this modern investment opportunity.
I hope you liked the article and learned more about Crowdlending 🙂
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