P2P

The 3 pros of p2p loans

Pros of peer to peer lending. Posted On
Posted By Eimantas

This is yet another post in my series about peer to peer lending. And this time I will cover the benefits of peer to peer lending. If you have no clue what peer to peer lending is then I would recommend reading my introductory post about p2p. It covers basic platform types and explains how it works. So let’s dig into the pros of p2p lending.

High interest rates

Average S&P 500 return over 10 years is ~10%. If you invest in specific stocks and not indexes or ETF’s then your return rate can be significantly lower or higher. For example, Google (now known as Alphabet) had years where their stock price grew over 100% but such stocks are rare and getting one in time is even rarer. So you should look at the averages. And my personal averages of different platforms seem to be all over 10%. And reading about other portfolios, it seems like 10-15% is the norm for most, and that’s if you account for bad loans. Of course, for the S&P 500, we can look at the long history of the stock market, while most of the p2p platforms are not even 10 years old. Most of them didn’t even experience the financial crisis. While it’s hard to get any concrete numbers, in the last financial crisis, a lot of investors reported negative growth or growth around 0%. But so far I haven’t found any concrete data, just individual cases. In the future, I am planning to review data that is shared by other investor bloggers.

Low capital requirements

One of the best things about peer to peer lending is that it has really low capital requirements. Of course, that depends on the platform of your choice, but so far I have seen platforms with a minimal investment size ranging from 5 to 100 euros. Most stockbrokers wouldn’t even cover minimal fees with 5 euros. And some stocks even cost more than that. So for example, if I have only 100 euros to invest, the stock market could get me a few stocks from one company with a large chunk of money going towards fees. While in p2p lending platforms like Finbee, I could invest in 20 different loans with no fees. Talk about diversification!

And that’s not all. Most stockbrokers or investment funds have a yearly fee to cover maintenance costs. So far I haven’t found or heard about European p2p lending platform that would have any some sort of fees for the investors. (Although most of them have fees for secondary market). And even for the cherry on the cake, some countries have tax breaks for gains from p2p lending sites. As I wrote in my post explaining why I chose p2p lending, Lithuania has a tax break for 500 euros made from p2p lending yearly. That’s not a lot, but it helps. 🙂

Easy to understand

Unlike the stock market or real estate investment, peer to peer lending is quite easy to understand. A loan is divided into small parts backed by different investors. This way the borrower can borrow a large amount of money and lenders only risk a small portion of their capital. Of course, there are some nuances, like loan insurance, buyback guarantees, borrowers metrics and diversification, but you can understand basic concepts in a few hours of reading. Trough to be told, this is probably one of the easiest investment types to understand. Probably only bank deposit is simpler than peer to peer lending.

So let’s get over the most common terms that you might need:

Buyback guarantee – this is most common in platforms like Mintos.com that sell loans issued by other loan providers. Buyback guarantee means that the company that first issued the loan, will be forced to buy it from you if the borrower fails to pay after a certain date. You will get back all of your capital. But most of the time won’t be able to keep interests gained from that loan. So for example if you invested 10 euros, got back 5 euros and already gained 1 euro in interest if the loan is bought back, you will get repaid to the amount of capital invested, that was not yet paid back. In this particular example, you should get 4 euros back totalling in 10 euros. (Sum loaned – paid back capital – interest acquired = sum you will gain after buying your loan).

Loan insurance – this one depends on the platform, but basically means that there are some sort of securities, if your loan defaults. You might get part of your capital back, you might get all of it. It really depends on the platform. Most often, if the loan is insured, some of its interest will go towards insurance costs. Also, there is a chance that some platforms define loan insurance basically the same way as above defined buyback guarantee. Nonetheless, both loan insurance and buyback guarantee is a safeguard against bad loans made to protect the investor.

Borrowers metrics – these one warry a lot between platforms. It really depends on the legal requirements of a country where the platform is based in and the sphere it is working in. In general, most platforms try to provide as much information about the borrower as they can.

Auto loan – this is one more thing that depends on the platform, some have it some don’t. Basically, auto lend allows you to specify loan settings and platform invests money in loans that fit your criteria. Although it is better to evaluate every loan yourself, unless you invest with a really small amount and have all the time in the world, you won’t have time to do it effectively. Even I have to use auto lend tools, simply because for the majority of my day, I am at work.

But of course peer to peer lending also has drawbacks, so I would recommend checking my post about peer to peer lending drawbacks. After all, it’s important to understand some of the risk involved in this type of investing.

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