Investing in peer to peer loans and equity-based crowdfunding cut out the banks from the deal. Learn how you can profit, avoid the most basic mistakes and decrease the risk of your investment.
Peer to peer lending or P2P lending is getting a lot of hype lately, and there’s a good reason for it. It is becoming an accepted and possibly fast way to raise capital, for an idea, a project or an entire business. It is now possible for small investors, to get in on a piece of the pie for a relatively small initial investment.
P2P lending has gone global since its origin in the UK in 2005. This new form of investment opportunity makes it possible for private investors to take the position banks usually hold, where they offer a loan to individuals or companies and receive interest. It is now possible for small investors, to get in on a piece of the pie for a relatively small initial investment.
The industry is growing and an increasing amount of investors begin to allocate their portfolio into crowdlending. The transaction value has grown 27.4% and the number of loans has grown 10% year over year. According to Transparency Market Research, the global P2P lending market will be worth $897 billion by 2024.
Disclosure: I am not a financial advisor by any means necessary. Always do your own due diligence and research before investing. I made this website because I wanted to learn more about money and investing. Some of the links below are affiliate links, meaning, I will earn a small commission if you click through and sign up to make an investment, at no additional cost to you.
Whatever your goal with investing may be, if it’s financial freedom, building a nest egg, education for your kids or your next planned vacation. When investing, I would recommend spreading the risk between real estate, stocks and peer to peer lending. I’ll explain what P2P lending is, and how you start out investing. I see it as the easiest way to get a decent return on my investment.
Types of crowdfunding
This blog is about investing for capital gains, but I’ll explain the different areas of crowdfunding. It is important to know of the different aspects if you want to gain the full advantage, as a business or an individual.
Equity Based Crowdfunding
Equity Based Crowdfunding is the process where peers or people (i.e. the ‘crowd’) invest in an early-stage unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. A shareholder has partial ownership of a company and stands to profit, should the company do well.
Reward Based Crowdfunding
This is perhaps the best-known type of crowdfunding and well-known platforms include Kickstarter, CrowdFunder, and Indiegogo. Reward-based crowdfunding involves individuals contributing money to projects in return for some kind of token or reward. This is also referred to as Donation Based Crowdfunding, because of the non-profit outlook.
Peer to peer lending
Crowdlending or peer-to-peer (P2P) lending is a method of debt financing that enables individuals to borrow and lend money without the use of an official financial institution as an intermediary. P2P removes the middleman from the process, but it also involves more time, effort and risk than the general brick-and-mortar lending scenarios.
Individual and professional accredited investors benefit by being able to lend money at a range of interest rates based on credit scores assigned by each platform. Since investors typically only fund a fraction of the loan and spread the amount they lend out to multiple buyers, investors can potentially receive steady, attractive returns while spreading risk across multiple borrowers.
Real Estate Crowdfunding
In the past, real estate development was only available for investment through private equity in the development company or through real estate investment trusts (REITs) and was not viable as a direct investment for most individuals. Real Estate Crowdfunding is either equity investing or debt investing.
Debt Investing means investing in a mortgage loan associated with a particular property. As the loan is repaid, the investor receives a share of the interest. In debt investing, you’re acting as the lender to the property owner or the deal sponsor. Depending on the structure, which varies by real estate crowdfunding platform — the loan is secured by either the property itself or a promissory note backed by the private limited company holding the property.
Equity investing means investing in commercial or residential properties and in exchange, they hold an equity stake in the property. Each investor shares in a portion of the rental income the property generates.
Investing in platforms that are not owned by a single loan provider guarantees a level of objectivity from the platform and makes it easier to diversify your portfolio, without having to deal with too many platforms.
Instead of investing in a platform that acts as the loan provider, you can invest in loans from multiple providers with platforms such as Bondora, Mintos or Viventor. Bondora profits from taking a percentage of all earnings and do not borrow money, so the risk of the platform going bankrupt is very low and even if it does, you still own the loan certificate. This makes it easier for you to spread your investment across multiple countries and several types of loans.
Why should you invest now?
Since the last financial crisis, it has become increasingly difficult to establish a loan as an individual or a company, and the market for alternative finance and peer to peer lending has grown steadily ever since.
During the same period, the banks have gained a lot of competition. If you’re not a bank, it’s a lot harder to give out a loan. You can’t just plug into a system and print out money, you need to actually have them. That’s why a lot of loan providers are in need of a lot more capital than the banks, and they can get that through peer to peer lending.
This is where alternative financing becomes interesting and that’s one of the reasons for the hype. Despite a terrible 2018 for equities, the stock market has shown high
It is not possible to predict the future of investing, but according to the predictions on Wall Street, the foreseeable future for investing in the stock market will be volatile and not nearly as profitable as the last decade. Because of trade wars, the tariff tensions on the stock market and a predicted US recession. It’s hard to say how the next few years will be, but a lot of investors will find joy in an at least promised annual return, higher than the predictions of Wall Street.
Where should you start?
Are you considering peer to peer lending? Then I recommend you to look into these platforms. Exactly which ones you invest in depends on your risk profile and your preferences, I would recommend that you at least split your investments across at least 2 platforms. This way you have something for comparison.
Their focus is on B2B loans, which the companies need short term loans for large purchases, liquidity for handling large orders or something completely different. They also have a number of property developers, that needs capital for the final stages of construction.
Mintos is by far the largest P2P lending platform in Europe, and with an average annual interest rate at 11.70% and Buyback Guarantee, there is a good possibility of high returns. At their marketplace, you can choose from loans from more than 30 different companies, or you can set up their advanced Auto Invest and let it run automatically. More than €1,7 billion have been invested through the platform since it started in 2015. The platform has been profitable since 2017, something most platforms have not achieved yet.
Viventor offers Buyback Guarantee on all their loans which means that until now, all investors have received their money again if the borrower has not been able to pay. They have a large selection of partners you can invest in, an advanced auto investment feature. Their interest is on average over 10% for consumer loans and more than 7% on loans that have underlying collateral in real estate.
EstateGuru is the largest platform of its kind in Europe and already operates in five countries, based in Estonia. It offers investment opportunities in secured property loans and developers borrowing from international investors. More than €98 million have been invested through the platform and a historical annual average return above 12%
Compare the European Crowdlending and Real Estate Crowdfunding platforms here
Tax from peer to peer lending
The tax rules differ from each
Find out if the platform you are investing in pays tax on your income, or if it is your responsibility.
Peer to peer Terminology
Investing in peer to peer is risky, but it’s possible to significantly improve your risk profile and make it a safer investment. In my opinion it is almost as safe as the stock market, but I have an interest rate on my investment of 10-12%, where shares can only be expected to have a 3-5%.
Best Loan size
Many new investors are impatient as it take some time before €10,000 is invested through a platform. Therefore, they invest large amounts in a few loans and only spread the €10,000 out on 200 loans.
Diversify your portfolio and decrease the risk
I recommend making a larger spread. Use the smallest loan size possible (usually €10), and most platforms can easily handle large sums. If you would like to invest larger amounts, I recommend looking at platforms where you invest in mortgages, that are maximally mortgaged 50%. This way you will have another assurance that your investment is never completely lost.
Read about the risks involved with peer to peer lending here
The Secondary Market
Many of the platforms have a secondary market where peers can trade with each other. This means that you can get rid of your loans if you need cash, or do not want to trade on the platform anymore. Or you predict turmoil in a particular country and would like to withdraw your investments.
It allows peers to trade loans or investments between each other and makes it easier to liquidate assets. The industry is new, so there’s not a real benchmark to follow. The platforms have their own iteration of an Auto Invest feature or a Secondary Market.
In the Secondary Market, it is about supply and demand and why you should expect losses. But it is better than being locked up and lose all the money. Mintos removed the fees on their platform in late 2017. This is clearly an improvement, as it ensures a more transparent market for the investors.
A Buyback Guarantee is a guarantee provided by the loan originator regarding a specific loan. If repayment is delayed by more than a specified number of days, the loan originator is obliged to buy back the loan.
The traditional method to acquire liquidity is to issue corporate bonds at approximately the same interest rate. Issuing bonds is a very expensive and inflexible solution. Some opt to sell loan shares with a promise to buy them back if the lender stops paying their debt.
A company like Viventor offer a slightly lower interest rate. It’s 10% on average, but they offer a large number of loans with their Buy-Back Guarantee. This means that the loan provider covers a loan if it is more than 30 or 60 days over time. In return, you won’t receive the interest. This does not guarantee that the loan provider cannot go bankrupt. But it can be an additional
Skin in the Game
Skin in the Game signifies a co-responsibility of the loan-issuer and is an additional security for you as an investor.
Example: A loan has a loan amount of EUR 100. The loan issuer or loan lender now contributes 5 EUR or 5% to participate in the loan. This ensures that there is not 100% risk for the investor community.
The euro has been stable for a long time. With turmoil in Greece, Spain, Italy, and Brexit, many investors have looked at new currencies to trade in. This is a way of spreading the risk, as you do not risk being locked in 10% in interest, with a currency that has dropped 30% on all your loans.
Platforms such as Mintos offer investments in several different currencies.
Default rates in P2P
Sometimes things don’t work out as planned. In investing, you have to account for losses and you can draw similarities to investing in the stock market. Do your own due diligence and research before you invest, and be able to improve or switch over time.
The default rate is the percentage of loans that have been charged off after a prolonged period of missed payments. Defaulted loans are typically written off from an issuer’s financial statements and transferred to a collection agency. A default rate can also be a higher interest rate charged, after a specified number of missed payments.
Transferring Money Online
When transferring money online, I highly recommend you use a service like TransferWise, CurrencyFair or
Disclaimer: Never risk more than you can afford to lose. Always do your own due diligence and research before you invest. Crowdinvestor is not responsible for the accuracy of the data provided or your choices. Just as I don’t get a cut of your returns, I won’t cover any losses that may incur from investing.