Financially Free With P2P Lending

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Financially free with P2P lending is my personal goal. Though many financial independence bloggers use the 4% rule or their own rules I have concluded that P2P lending would be the best fit for financial freedom for myself.

Currently, I attend school between 4 to 8 hours and I am expected to read between 1-2 hours per day. Worst case is 10 hours per day. This leaves me with 14 hours left. I am sleeping for about 8 hours. This leaves me with 6 hours to see friends, family, write on this blog, being with my girlfriend, making dinner, etc.

There is not time enough for me in a day to have the mental surplus to excel in all of these daily tasks.

I am not committed to being a 10 hour per day student (maybe 7-8 hours) and furthermore, I want to be more committed to things that interest me like blogging, friends and my girlfriend. I am living a frugal life to set up my financial future for exclusive (not financially) traveling with my girlfriend, work hours on my terms and other stuff which comes with the benefits of being financially free.

Going financially free with P2P lending seems like the best option for me to reach these goals.

Is P2P Lending A Good Investment?

Theoretically, P2P lending is one of the best options for financial freedom (Or maybe just the best investment in general). Here is why:

  • Double-digit returns
  • Your investment does not decrease in value
  • It is sustainable
  • The compounding effect

The return you can get on most platforms are 10% and higher normally. Considering that other investments such as stocks are known to increase 7% with dividend reinvested, P2P lending is 3% better per year. When you compound those 3% per year you end up with a much higher return.

Let us say you invested in index funds. They are known to be more stable than stocks. However, like stocks index funds (which is seen as a safe investment) can decrease in value. P2P lending cannot decrease in value. When you lend €10 to a 10% return you expect €1 in return after a year.

When aiming for financial freedom you want money which can be withdrawn at a safe rate. When you have reached the monthly income you want to live comfortably with, you can start withdrawing the money you make on the investments, rather than reinvesting them. Again, it is a sustainable method of maintaining a determined portfolio value, while being able to withdraw money.

One of the most essential terms you will ever encounter within the investing community is the compounding effect. The compounding effect is in essence reinvesting the return you get from your investments back into your investments. Over time the compounding effect will earn you more money than the actual investments.

Returns From Investing In P2P Lending

My returns from P2P lending is currently double-digits. My average return in August was 15%

P2P Lending Portfolio
P2P Lending Portfolio

Though I am not worth millions I am trying to heavily increase my funds on P2P lending platforms. You can follow my monthly portfolio updates. Here you can see how much each investment type is worth and how much money I make from the investment types.

Why Use P2P Lending?

As I just described in the previous section P2P lending is the ideal investing method when you want to be financially free.

However, from personal experience, I have gained some knowledge on the P2P lending industry. One of the first things I learned is the way you have to secure yourself. In other words, you have to proper due diligence of your investments. This is both for the loans you are investing in, the loan originators and even the P2P lending platforms you are investing in.

I have managed to keep my funds secure. So far I have not lost a single dime investing in P2P lending. In the perfect world, every borrower repays their loans. However, this is not always true. While the borrowers will in the majority of the time repay the loan, some borrowers default and this means that your funds could be lost. However, with the proper investing strategies and using the right platforms you can eliminate most of the risks of losing your funds.

When your investment account on the different platforms are earning you enough to be financially free, you can withdraw the earnings rather than reinvesting them. Whereas most financial independence (retire early) bloggers grow index funds, which when big enough starts to withdraw the money from the index funds. This means that the index funds will be worth less and less over time when you reach financial independence. With P2P lending your investment portfolio stays the same value and provides the same amount of income. Therefore, it has a huge upside to the traditional investment types.

Compounding Effect Of Investing

The compounding effect you can achieve with P2P lending is phenomenal. Normally investment types such as index funds and stocks pay a dividend once per year or maybe once per quarter. With P2P lending you can compound your interest as soon as you have enough for the minimum investment amount (which is typically €10).

I have made a compounding investment calculator so you can visualize how much money you can make over X period of time with X amount of money.

Difference Between Index Funds and P2P Lending

One of the classic ways of financial independence (retire early) is through index funds. When the index fund has reached a comfortable size they will start to withdraw the funds from the index fund to pay for their lifestyle. While is this an effective and proven method, I think P2P lending is a much better alternative.

When your P2P lending portfolio has reached the comfortable size you will start to withdraw the interest instead of the actual portfolio. This way you will have a big portfolio size which will not decrease over time. The P2P lending portfolio will keep its size while you only withdraw the interest. By doing this you have a large net-worth which can be used in extreme emergencies, whereas the index fund way can lead to big problems if the index fund size is running low.

Why You Should Not Pay Off Your Mortgage (And Why You Should)

In 2019 you have the opportunity to receive some amazing interest rates from the banks to your mortgage. Several bloggers who are not paying their mortgage. One of them is FinancialIndependentMom. One the of arguments she is making is the same as the one I have. You can get higher returns through investing, than by paying off your mortgage.

In Denmark where I live the law states that we have to pay for at least 5% of the total purchase value. A realistic pretty house is around €340.000. This means as a Dane you have to pay at least €17.000 when acquiring the loan and the house.

FinancialIndependentMom is so lucky that she did not even need to put down any money when purchasing their house. This means they can invest the money right away. You can read more about that here.

However, as a Dane, I am forced to pay the 5% by law. But, I could chose to only pay the minimum amount towards the mortgage. In Denmark we can get interest rates (fixed) for as low as 0,5%!!!!! that is simply insane. In P2P lending I can get 10% or even more. So instead of investing my investment funds into the mortgage at a 0,5% rate, I can invest in P2P lending and get 10% or higher returns. Let us take an example:

  • First option: If I were to pay down the mortgage with €15.000 extra per year instead of investing I would pay down the €15.000*0,5% = €75 less interest per year.
  • Second option: If I were to invest the €15.000 I had extra per year at a 10% interest rate with P2P lending I would get €15.000*10% = €1.500 per year.

In other words, I would earn €1.425 per year when investing rather than paying down the mortgage.

Why Not To Be Financially Free With P2P Lending

While P2P lending has its many great advantages it also comes with disadvantages. Sadly, a number of the disadvantages is due to the youth of the P2P lending platforms. They have not stood the test of time.

The first P2P lending platform was launched back in 2005 with the second launching in 2006. However, there has not been any other platforms through a global recession as the housing bubble from 2008.

The historical risks of P2P lending is therefore limited to the launch date of the first P2P lending platform.

Another major risk to your portfolio is national crises’ in countries which you invest in. Let us say you are lending to Russians through the Mintos P2P lending platform. If Russia were to go into a war with European countries, businesses such as Mintos could be foreclosed to Russian businesses.

To be financially free with P2P lending therefore carries a great amount of risk which has yet to be proven or myth busted. If you are already invested in P2P lending platforms you can read my 7 tips to mitigate the risks of investing in P2P lending.

P2P Lending In A Global Market Recession

In 2005 the first-ever P2P lending platform was introduced to the UK market. In 2008-2009 the housing bubble (financial crisis) happened and people lost their homes and jobs.

From an investing perspective financial crisis’s is where you can make a lot of money. This is where the millionaire and billionaire purchase properties for half the sells price, loans from bankrupted banks and commodities.

Zopa proven returns
Zopa proven returns (source: Zopa)

Some platforms are responsible for the loans provided. An example of this is Envestio. They are internally determining who to borrow money to. Whereas, a platform like Mintos and Grupeer is a middleman between the investor and borrowing providers (known as loan originators).

On platforms such as Mintos and Grupeer, the loan originators would have to go bankrupt for the loans to default.

While every business does not have the strategy and financials, assets and liabilities Zopa proved through 2008-2009 that P2P lending can survive a global recession. If that will be the same results in the next recession will be unknown. Furthermore, it will also depend on if the next recession is industry-specific. The 2008 collapse is known as the housing bubble, hence a lot of mortgage loans must have been defaulted.

Conclusion

Being financially free with P2P lending seems to have its advantages. However, as it is also discussed it seems to carry some risks. Most of the risks that cannot be mitigated are based on historical data, which P2P lending lack.

While I think I have some valid reasoning to become financially free with P2P lending the use of dividend stocks and index funds are commonly used. If you are on a journey to become financially free but are not willing to take the risks with P2P lending, you should investigate how other financial free bloggers have achieved financial independence with stocks and index funds.

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ThePoorInvestor
I am ThePoorInvestor and I am on a financial independence journey. I am investing in P2P-lending to create a high cash-flow return. I disclose my income, expenses, investments and everything financially relevant. It is all for you to see, I have nothing to hide. I have invested in a total of four different investment types throughout my 2 years of investing.
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