In the interest of full disclosure, the links to Mintos in the following article are affiliate links. This means that if you sign up to Mintos using this link I will get a reward however you will also get a 1% bonus on the amount you invest in the first 90 days. This will be calculated and paid to you after 30, 60 and 90 days.
What is P2P Lending?
P2P lending, also called crowd funding, means peer-to-peer lending. In its simplest form it allows a loan to be provided from one individual to another without using traditional banks. Effectively it removes the middleman and this allows the lender to receive the benefits that the banks would usually take while also allowing the borrower to get a lower interest rate than would be provided by a traditional bank. P2P lending has only existed since 2005 but has grown rapidly. There are many P2P lending sites, the largest site for European investors is Mintos. There are many others such as Peerberry, Investio, Bondora, Grupeer and Fast Invest. American based options include Lending Club, Funding Circle and Peerform.
How does P2P Lending work?
The P2P lending site allows both investors and borrowers to sign up. It facilitates the loan, displaying all loans to investors along with terms and rates of return. The rate of return varies depending on the credit worthiness of the borrower, higher return means higher risk. The investor deposits a sum of money and then chooses loans that they want to invest their money in. Once the term has passed the borrower repays the loan and the investor is repaid for the loan including the interest.
Can i make money with P2P lending?
The simple answer is yes! Returns vary from site to site based on the type and risk of the loans anywhere from 3-25%. However, as with any investment there are risks involved that need to be considered before investing any money. The larger the return the larger the risk. I have invested €1000 of my own money on Mintos and so far I have achieved about a 14% return which is very high. I will have an article soon based on this showing how I set up my portfolio to avoid risks so keep an eye out!
What are the risks of P2P Lending?
There are 4 types of risk associated with P2P lending.
P2P Platform
The risk with the platform is that the platform becomes insolvent. In this case the loans between you and the borrower are still valid and there is a good chance that you will get your money back, but it may be delayed and it is possible that you will not get it all back. Choosing to invest in a more established platform such as Mintos helps to reduce this risk.
Loan Originator
Lots of P2P lending sites get their loan offers not from individuals but from companies who provide loans. When you choose one of these loans the loan contract is not between you and the end borrower but between you and the loan originator. If this loan originator defaults you are at risk of losing your investment. By doing some research into each loan originator and spreading your investments over a number of loan originators you can reduce this risk.
Borrower
If you invest in a loan and the borrow fails to repay you can lose your investment. By investing small amounts in multiple loans you can spread this risk so that the returns from your successful loans cover the loss from the loans that fail. Also a number of P2P platforms have a buyback guarantee. This means that the loan originator takes this risk and regardless of whether the borrower pays back the loan or not you get your expected payment. Depending on the loan the payment will be made once the loan become 15, 30 or 60 days late.
Liquidity
Once you agree to a loan the money that you have invested into the loan cannot be touched. This means that you should only invest money that is genuinely free to invest as in the case of emergency you cannot get this money. Some providers provide a secondary market that allows you to sell your loans so that you can get your money out but this depends on demand and the rate of return you receive will be drastically reduced.
Partial Investment
It is possible that some or all of your money can sit in your P2P account and not be invested. This money is making no return. Lots of P2P platforms have an auto invest feature which makes sure that your money is always fully invested and making you money
Should I invest in P2P lending?
P2P lending is a good way of getting some good investment returns but like any investment, P2P lending has its risks. If you feel comfortable with them and have some money saved which will not be needed in emergencies then by all means I think go for it. I would advise you to do some research into the different platforms and to start small and build some confidence in the platform. I made my first investment in Mintos and so far I am very happy with the returns. It is one of the more established platforms and it provides a number of ways for you to reduce each of the risks. I will provide a more in depth article on Mintos soon so keep any eye out for that!What else should I know about P2P Lending?
One other point that you should know and consider is that profits from P2P lending, just like most other investments, are taxed. In Ireland you will pay tax at your higher rate of PAYE. See this document from the revenue for more details.
