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Peer-to-peer (P2P) lending is an alternative form of lending that allows individuals to borrow and lend money directly. Online platforms such as Bondora, Mintos and Estateguru mediate between borrowers and lenders, with returns of between six percent and 18 percent per year possible. Risks for lenders include default and liquidity risks, while borrowers may have to accept higher interest rates and smaller loan amounts.
Peer-to-peer (P2P) lending has gained popularity in recent years as an alternative form of lending. There are different platforms that connect people who need a loan with investors who are willing to lend their money.
But how exactly does the concept work and what risks should be taken into account? Here you can find out what you should know.
What are P2P loans?
P2P lending, also known as P2P lending, allows individuals to borrow and lend money directly without a traditional bank. “P2P” stands for person-to-person. These transactions often take place through online platforms that act as intermediaries between borrowers and lenders.
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What are the advantages of P2P loans?
When looking at the advantages of P2P lending, it is important to differentiate between borrowers and lenders.
Borrowers have the advantage of potentially getting a loan through P2P lending that they would not otherwise have received. In other words, if your credit rating is low, for example, you could still have a chance of finding a lender with P2P loans.
Lenders, on the other hand, can use P2P lending to diversify their portfolio and earn interest on the money they lend. Investors can only earn cents or receive several thousand euros per month. The income of course depends on the interest rate and the amount of capital invested.
Lending is also popular as a source of passive income. Returns typically start at around six percent and can range up to 18 percent per year. But the same applies here: the higher the return, the higher the risk.
What is passive income?
Most people have an active income. This means that, as employees or self-employed people, they perform physical or mental work and receive money for it. The idea behind passive income, however, is that it generates itself – without you having to actively work for it.
What are the risks of P2P loans?
Here, too, a distinction should be made between lenders and borrowers:
Borrowers have the disadvantage that they often have to prepare for higher interest rates than with traditional banks. In addition, the loans can be limited to smaller amounts.
Of course, lenders have the risk of default if the borrower does not meet his payment obligations. Depending on the platform, it is worth checking how such a case is handled.
Another aspect that lenders should consider is liquidity risk. Depending on the loan, it may be difficult to get the money lent before the end of the term. It can also happen that platforms incorrectly assess the creditworthiness of borrowers. In such a case, the risk of your lending may be higher than you originally thought.
There are also some scam platforms. This risk exists for both borrowers and lenders. This means that platforms, for example, lure people with particularly high or low interest rates – and then turn out to be wrong.
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These providers of P2P loans are available on the market
Once you have weighed up the opportunities and risks for yourself, you can look for the right portal. There are a variety of P2P platforms. The best known include: Bondora, Mintos and Estateguru. Each provider has its own characteristics and target groups. There are different comparison sites, where you can check the conditions of the respective portals. These can differ, which is why thorough research is necessary.
If you invest a larger sum, you can use an automatic portfolio builder on the respective platform. This means: If, for example, you deposit 1000 euros on the platform, your money will be distributed across various loans. This automatically adds up to 1,000, 10,000 or hundreds of thousands of loans very quickly. In principle, it’s like a fund that tracks hundreds of stocks.
You can set the criteria beforehand. Similar to an ETF savings plan, your money is then invested automatically. With the criteria you can individualize numerous characteristics of your loan, such as the creditworthiness and the country of the borrower.
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The best tips for P2P loans
There are a few things to consider when it comes to P2P loans. We’ve put together some tips from investors we’ve spoken to over time. You should pay attention to this:
Check interest rates for borrowers and returns for lenders Minimum investment and loan amounts should be checked Take a look at the portal’s credit check procedures and risk assessment systems If you want to invest 1,000 euros, it is also “not advisable” to invest 100 euros per loan, says P2P -Credit expert Lars Wrobbel, in conversation with Business Insider. Because then you would only invest your money in ten loans and if three of them defaulted, your portfolio would be hit hard. “My rule is that I invest a maximum of one percent of the amount I have on the platform in a loan.” That means: For 1,000 euros, that would be a maximum of 10 euros per loan. It can also make sense to spread the money across different types of loans. So don’t just invest in consumer loans. In addition, you should not be blinded by returns that are too high or unrealistic. If a platform has been on the market for a long time and has audited business reports that you can look at, this is an indication of a reputable company. In addition, because of the risks mentioned, it does not necessarily make sense to invest all your money in P2P loans. When investing, the general rule is to spread your capital across different asset classes.
Disclaimer: Stocks and other investments generally involve risk. A total loss of the capital invested cannot be ruled out. The articles, data and forecasts published are not a solicitation to buy or sell securities or rights. They also do not replace professional advice.