Have you ever dreamed of stirring interest rates every month without a finger?
And really every month? You do not have to dream about that anymore. This phenomenon is called P2P loans. In this article you will learn about this new trend and how this trend will help you build your financial cushion.
This is how you come into play
The P2P platform (mostly) does not lend itself. After successful verification of the documents, the loan application is communicated to investors via the platform and the platform receives a commission on successful financing. The platform also monitors whether loan agreements are adhered to and, if necessary, takes legal action.
Depending on the platform, you can invest as little as 10 euros in a loan project that is financed by several investors together.
Depending on the risk you can with a return of 5-15% pa . expected.
Why does not the borrower just go to his house bank?
That is a legitimate question. For the borrower, fast processing is an important advantage. The borrower also saves the way to a bank and can easily do everything from home.
Overall, lending is easier and often less bureaucratic. Nevertheless, the platform ensures compliance with quality requirements. According to information from Lendico, only about 10% of loan applications are accepted by Lendico. Only then can these loan projects be financed by investors.
Last but not least, the cost of borrowing through P2P platforms is often lower than traditional bank loans or overdraft.
Which P2P platforms are there?
Since the release of the first P2P platforms, a lot has happened. The volume of P2P platform-financed loans increased to more than $ 26 billion in 2015 (Transparency Market Research, 2016). This trend continues. Various studies among others by Ernst & Young and Tomorrow Stanley anticipate potential for tremendous growth over the next few years.
Why are investments in P2P loans interesting for you?
- P2P credit is an asset class that is (almost) independent of the stock and bond market. This is how you spread the risk of your portfolio
- The investment risk is higher than traditional savings, so you will be rewarded with a higher return. Depending on the risk, you can count on 5% -15% return pa.
- You support with your financing another person who just needs the money.
- You can choose loan projects with short and variable terms (from a few days to several years)
- Depending on the platform you can already invest with 5-25 euros. Is it great?
- In contrast to investments in securities, there are hardly any charges for P2P loans. Lendico charges 1% of the interest and principal payments, while Auxmonex deducts 1% of the asset number. Bondora, , Twino and many other platforms do not charge any fees for investors !!
- Higher liquidity and lower risk through monthly repayment (repayment of loan installments + interest). Since you get a part of your money invested every month, including interest, less and less money is tied every month. In the case of total default, you do not lose 100% of your capital, which is the case with classic bonds
Case would be.
- The default rate on loans is low. Auxmoney, for example, advertises a default rate of 3%. At , there are only 0.3% failures (due to the platform’s buyback guarantee, which will be explained in the next post). Financial cushion has so far incurred no defaults on Lendico (invested since 2014), , Twino (both since June 2016) and Bondora (since August 2016) (so far involved in about 1000 loan projects).
What do you have to consider when investing in P2P loans?
- High returns mean higher risk at the same time. Make sure you never put all the eggs in a basket, but split your investment on several projects.
- Spreading the platforms can also reduce the risk. In case of insolvency of the platform, you can not access your money in the meantime.
- Only invest with the money that you certainly will not need in the near future. Unlike a call money account, you can not get out of your investment at any time.
- Ask yourself if you can handle the total loss, and start investing small.
- As always, let your money work for you and do not overdo it (except at the beginning).