P2P investing is an alternative way to invest. You can earn up to 20% return on your money, and its really simple to set up!
What is P2P Lending?
P2P (means peer to peer, i.e. from me to you) lending is a method of financing debt without going through a financial institution such as a bank. Without using a middle entity (i.e. a bank) the borrower receives a better interest rate, and the person issuing the money (the investor) receive a higher return investment interest rate return, compared to term deposits or bank interest, for the investor. P2P investing, on the other hand, is the practice of investing in loans issued by a borrower.
How does P2P Investing Work?
You (the investor) can search through other peoples loan applications, and decide if you would like to invest. Generally , you would invest small amounts of money across multiple loans for diversification. Similarly, one loan application, will have multiple investors. P2P investing can be enticing due to a high rate of return (can be 20%+), and regular stream of income (interest and principle paid back each month). However, like all good things, there are disadvantages and risks to be aware of as well.
The Advantages of P2P Investing
P2P lending has many advantages, including:
Higher Interest Rate – with P2P lending, you are either able to set the interest rate (i.e., RateSetter), or are able to choose a return based on the risk you choose to take (i.e., Mintos)
Compounding Interest – most P2P platforms have an automated way for you to reinvest you money. Generally you can select the interest rate, timeframe and other types of loan that can be automatically selected for you (however, this can also be a disadvantage).
Steady Stream of Income – P2P loans are generally paid back to the investors account on a monthly basis, including a percentage of the interest, and principle invested. This type of return provides money to be constantly entering your account each day or month (depending on your investments).
Diversification – you can select the amount of money you would like to. With platforms such as Bondora, you are able to put a small amount of money into multiple loans, spreading any risk of default.
Ease of Use – Creating an account and transferring money into the account is a very simple, streamlined process. Investing in loans is also as easy as clicking a button or 2. Generally you can link your TransferWise account with all platforms.
No or Low Fees – Generally there isn’t fees associated with investing in loans.
See my Mintos account returns for a diversification and steady stream of income examples.
The Disadvantages of P2P Investing
P2P investing also has some disadvantages, including:
Risk of Default – Unlike banks which are classed as relatively safe, P2P investing has a higher risk. However, platforms such as the risk of default has been minimised in accounts such as Mintos and Grupeer (who have options for a buyback guarantee if no funds have been received in 60 days), and RateSetter (who have a provision account in case of defaults).
History of Loan Applicant – In platforms such as Mintos, Grupeer and Envestio, you are able to choose the loans that you would like to invest in, but the information about the applicant can vary greatly. Sometimes, with personal loans for example, all you may see is the sex of the person, and their age. Business loans generally show more information, but it depends on the loan originator. In platforms such as RateSetter, your money will get automatically invested into a chosen loan applicants account (you don’t get to choose this). This is why it is important to choose wisely which investing platform you go with, and ready how people are vetted for loans.
I have created a round up of the most common platform features that are offered:
Automatic Reinvestment (Auto Invest)
Most platforms offer some kind of automatic reinvestment tool which allows investors to take a complete “hands off” approach to investing. The tool generally allows investors to choose between:
- loan type (Business, Personal etc)
- loan originator
- interest rate (%)
- investment term (investment time in months)
- strategy auto-invest limit
- max amount per project
- repayment type (amortization)
- invest in loans already invest in
- expiry date of the reinvestment strategy.
The secondary market is a place where investors can sell their already purchased investments to other investors. The secondary market allows:
- increased liquidity, by allowing investors to sell out of a loan before the loan period is up
- increased revenues, by allowing investors to sell loans at a premium to their original value
- potential investors more options for purchasing loans
- potential investors to buy secondary loans at a discount to their original value.
Buyback Guarantee / Default Guarantee
When investing in P2P loans, it is important to decrease your risk as much as possible. One way of doing this is to invest in loans that offer a buyback guarantee. A buyback guarantee provides assurance from a loan originator if the loan was to default. Buyback guarantee works by returning invested funds to an investor if a loan goes 5-60 days without a repayment.
The investor buyback is a service that some of the platforms provide, where they offer to buy the loan from you if you need to sell (for any reason). The platform will generally take a commission for this service.
Some of these platforms will refer to the investor buyback as a “buyback guarantee” as well. While its not technically an incorrect term, it can make it confusing with the other buyback guarantee for repurchasing defaulted loans.
If you invest in a P2P loan that has the cashback deal applied, you will receive the value of the cashback back into your account. Cashback offers usually have set conditions, including a specific time frame that the offer is open.
Most platforms offer some type of referral system. The referral system allows investors to earn additional income. The system works by the investor sharing their referral code code with a friend, who will then sign up for the product. The platform will reward both the initial investor and the referred friend with a bonus. Amounts refereed will vary between platforms and loans invested in.
European P2P Investment Platforms
Bondora (Average return 9.14% – 17.14%)
Bondora is an Estonian P2P lending company, and was founded in 2009. Bondora only allows users to invest in Euros, and focuses on unsecured consumer lending in Finland, Spain and Estonia. The investment base has over 45,000 investors, and boasts historical annual returns of over 10.7%. Only personal loans are issued through Bondora.
Mintos (Average return 11.69%)
Mintos is a Latvian P2P platform launched in 2015, and classes itself as a global online marketplace for loans. At the time of writing (December 2018), Mintos facilitates 58 loan originators which operate in 28 countries. The average net annual return for investors through Mintos is 11.16%, with more than 95,000 investors registered. Each investor has an average investment of over 4,000 Euro. Loans issued through Mintos are varied, including business, personal, mortgage, agricultural, short term, pawnbroking, invoice financing and car loans. Mintos also has a secondary market, where people can buy or sell their part in a loan for a discount or a premium, allowing for you to achieve an even higher return.
Grupeer (Average return 14.40%)
Grupeer is a Latvian p2p platform, created in 2016. Grupeer works in a similar way to Mintos, whereby acting as a platform that allows loan originators to issue loans. Currently Grupeer only accepts money transfer from licensed credit institutions of the European Economic Area, and only deals in Euros. Loans issued on Grupeer focus on investments in credit deals (i.e. secured loans issued to individuals or small businesses), and development projects.
P2P and Crowdlending Investment Platform Reviews
- Mintos Review
- Bondora Review
- Fast Invest Review
- Kuetzal Review
- Grupeer Review
- Envestio Review
- Viainvest Review (from friends at OnlineMoneySpy)
Best European P2P Investment Platforms
Each of the various P2P investment platforms offer different loans to invest in, different rates of return, and different opportunities.
Disclaimer: I have an interest, and have invested in all platforms mentioned in this article. You can see the returns of my investments through the page My Returns.