Have you thought about how to invest in P2P lending? I know I did back when I started. Whether you are new to P2P lending or experienced there are some great inside to be learned from this post.
When being new to something it is nice to have someone that can help or guide you through the start until you get the hang of it yourself. I will use this post to help you get a good start in P2P lending. The post will include everything from understanding your risk, diversification options, your financial goals, investment strategy, investment options and so forth to maximize your success rate.
P2P lending is easy to get started with. When beginning the journey of investing in loans through P2P lending there are four main subjects that you should have control of: finding the right platform, developing the right strategy, setting up the investment account(s), and control, monitor and adjust the portfolio. The right platform is based on your preferences. Whether you want high returns, secured loans, less risk or to diversify there is a platform for your needs. You want to consider your financial goals and why you invest and therefore develop an investment strategy. When you have developed an investment strategy you will need to set up an account with a P2P lending platform. When the set up is done you have to implement the strategy on the platform. Lastly, you have to monitor it frequently and make sure you adjust the platform settings to match your investment strategy.
The use of P2P lending is not that difficult, but there are some tips and tricks that are worthwhile to know before getting started. I will highlight and teach you the elements of setting you up for success in P2P lending.
While you can get started instantly by signing up on a platform like Mintos or Grupeer that has a great reputation, following this guide will set you up for success rather than just throwing your money in random investments.
Find The Best P2P Lending Platform
Finding the right platform can be difficult when you are new in the P2P lending space. There is a ton of information and many different platforms to chose from. There is a big difference between the platforms available. Some platforms offer great security for the investors, while some offer maximization of profits.
When selecting a P2P lending platform you have to look for the following aspects to ensure profit maximization with a level of acceptable risk:
- Reading P2P lending reviews
- Evaluating the risk
- Looking into the diversification options
If you want to go straight to investing you can find the platforms I have reviewed and recommend on my recommended platforms page.
To find the platforms which offer a mix of security and high returns is hard work. Luckily for you, I have done extensive reviews for you to speed up the process. Furthermore, you have to consider your risk willingness, whether you are high risk or low risk. Traditionally high risk means potential for high reward, likewise is low risk means potential for low rewards.
Finding the right platforms is a combination of reading reviews, experience and understanding the risks of the platforms. A lot can be learned from reviews. A known method to lower risk is to diversify your investments – This statement is also true for P2P lending.
Reading P2P Lending Reviews
Getting a deep understanding of the platforms can be a tough challenge when you are just getting started. There are multiple ways to investigate and get a deep understanding of the platforms. One is to visit every platform that you have in mind and look through their FAQ, about the management, financial statements, statistics and track records, learn how the platform works, etc.
Another way is to read reviews made by others. This can give you fast inside to the platforms and you get a deep knowledge of the topics that matter. In my quest for helping you, I have made several reviews for you to read.
- Mintos review
- Envestio review
- Grupeer review
- Swaper review
- VIAINVEST review
- BitOfProperty review
- Fastinvest review
- Bulkestate review
- Crowdestate review
- Debitum Network review
- CoinLoan review
You shall of cause not read all of them if you are just looking for 1 platform. If you are looking for a platform to start on, you should just look into Mintos. This is a must in every investor’s portfolio if you are into P2P lending. Mintos is the biggest European platform with the largest portfolio of loan originators and you can start investing for just €10.
It should be said that learning about other platforms will also help you understand the P2P lending industry. Everything from secured debt, buyback, LTV, and many other jargons used in P2P lending.
In the search for a platform to invest with, you need to consider your risk willingness. Each platform is exposed to its own set of risks. For example, a platform like Envestio has only 1-4 loans per month. There is no buyback guarantee (in case of defaulting borrowers) and are often not fully secured by collateral or other debt. However, Envestio offer returns of up to 22%. Platforms like Envestio crowdfund the loans on behalf of Envestio, hence no external loan originators.
The contrast to Envestio is platforms like Mintos and Grupeer. These platforms consist of loan originators who serve loans through a platform and manage most of the risk mitigation. Furthermore, they enforce safety to the investors through features like Buyback guarantees, risk ratings, penalties on delayed repayment and much more.
The risk is also based on the size of a platform. If a platform is small it has less capital to withstand bad times. If a loan originator is going out of business and has outstanding loans you will lose your money. A buyback guarantee is attached to the loan originator and not the P2P lending platform. Therefore, P2P lending platforms will not save you from financial losses when buyback guarantees are issued on loans.
The last factor of risk is the track record from the platforms. If a platform has issued 50.000 loans and has 10.000 defaulted loans, the default rate is 20% which is not acceptable. In essence, this means that you will have a 20% chance of losing your money. However, if out of the 50.000 loans only 10 has defaulted the default rate is only 0,02% which must be seen as acceptable.
Continue reading about the 7 risks of P2P lending in detail.
The last factor of finding a nice match is the consideration of diversification. Diversification is a big topic in P2P lending. Some platforms like Swaper and VIAINVEST consists of consumer loans. Whereas, platforms like Mintos and Grupeer has multiple loan types spread across multiple countries in multiple risk categories.
When you are trying to find a platform to invest with, consider having the option for diversification, at least if you are a first-time investor. The idea of diversification is to spread the risk of your investment. This can be done by investing in different industries, countries, currencies, loan types, etc.
A platform like Envestio or Crowdestor with only a few loans has found ways to diversify across industries. A platform like Mintos has different currencies, lending types, countries, and industries. This allows for broader risk diversification. Broad diversification is not always needed if you have a higher risk willingness and are going for some higher returns rather than a safer portfolio.
Now that you have a clear guideline to selecting a P2P lending platform, your next step is to look into developing a strategy that fits your financial goals and that can be done through the P2P lending platform(s) you have selected. You can head to my recommended platforms overview to scope the best platforms.
Develop A Right Strategy
Developing a strategy is necessary to keep your discipline and head in place when the market shows signs of instability and to keep your paycheck towards investments instead of Starbucks and booze. Developing a P2P lending investment strategy is just like developing a 401K or ISA strategy. You might not think much about it, but you have put some thought into it anyways.
Each month you deposit a fixed amount or maybe a percentage of your income towards your pension fund(s). Furthermore, some cap out pension funds and some just deposit small sums. It is all very dependent on the individual, but it requires some thought and a little work.
When developing your P2P lending investment strategy, you have to consider the following aspects:
- Consider your financial goals
- Loans backed by collateral or secured in another way
- Backed up a BuyBack guarantee
- The use of auto-investment tools or manual investing
Whether you formally right down the strategy or simply have on top of your head, it is significant that you use at least 5 minutes to think about each aspect.
Consider Your Financial Goals
A big part of developing your strategy is the aspect of your financial goals. This includes the time horizon for your investment, the risk willingness, and the control which you wish to have over your portfolio.
Example of Investment Strategies
You have to understand the time horizon in which you will be investing. Let us make two examples. The first example is me, a 24-year-old engineering student with about 1 year to graduation. I will be investing in the long term. However, I am planning on buying a house, which means that I will have to pull some money out of my P2P lending portfolio to make the down payment on the property. In this case, I can invest some money in long-term loans, but I will need to invest in short term loans as they are more liquid. This will allow me to withdraw from the short term loans when the down payment has to be made.
The other example is a 35-year-old full-time employee, with the average 2 kids and partner. He has a house and 2 cars, with the regular expenses of a family and house owner. He needs to worry about retirement, education for his kids, vacation and so forth. When you have landed in that middle-class ordinary life, you can start to budget your way to control. You now have the power to be very long term. You can invest the money you do not need before retirement. You can accumulate some serious compound interest.
In the example above two people have invested at different times with different amounts.
|Amount of wealth accumulated before 65 years of age||4.685.000||1.625.000|
While Jon only invests 5.000 per year he will end up with over 3.000.000 more than Bob. This is, of course, an oversaturated calculation because it does not include taxes, economic downturns, etc. But you get the point anyway. The sooner you start the better you can set yourself up for retirement.
Going back to the 2 previous examples, I will most likely be in a better economic situation than the average 35-year-old with 2 kids and a partner even though he might invest more.
Collateral/Secured Debt and BuyBack Guarantee
Another part of developing your investment strategy is how to secure your funds during the investment period.
Having security in loans is necessary if you are planning on having a successful investment journey in P2P lending. The 2 methods which can ensure a safety net under your investments are collateral also known as secured debt and buyback guarantee.
It is very relevant that you understand the principles of buyback guarantees. When a loan is secured by buyback guarantee you can expect the loan to be bought back in case the borrower defaults. This is very helpful to keep your portfolio from depleting to bad borrowers.
The other side of the coin is the responsibilities from the loan originator or P2P lending platforms to actually sustain paying the buyback guarantee. If a loan originator goes bankrupt they will have no money to repay the buyback guarantee. Therefore, you are not fully secured just by finding loans with buyback guarantee (although a very good idea).
Using collateral/secured debt is another way of getting security in the loans. First of all, you are ensured that there is liquidity to repay the loans if the borrower defaults. Secondly, it ensures that the borrower is committed to repaying the loan. On platforms like CoinLoan, the collateral has to exceed the amount which is to be borrowed before they can be approved.
Auto-invest or Manual Investing
The last step of consideration in your investment strategy is whether you are going to be using the auto-invest option offered on many platforms are manual investing.
|Pros||– Time to evaluate loans thoroughly.|
– Time to investigate industry, area, and business case for the loan.
|– Acquire loans faster on competitive platforms.|
– Fit your selected parameters for loans.
– Can miss aspects of your strategy due to human error.
|– Does not get to evaluate loans and the business case.|
– Auto-invest might not have the settings to support your strategy.
When using project-based P2P lending platforms such as Crowdestor, Envestio, and Kuetzal it could be wiser to manually invest, rather than using an auto-invest. Manually investing will allow you to review the projects in detail before committing to something that you might otherwise not invest in. Whereas the auto-invest will just match loans with the settings, and fit loans regardless.
While manual investing gives you the time to investigate the loans, it will also make other investors prone to invest before you. And if the competition for loans on the platform you might not get to invest in the projects. Personally, I use auto-invest on P2P lending platform Envestio, as I would not get to invest in any loans as there are many hungry investors chasing the high yielding projects.
One other major thing related to auto-investment tools is the settings that are offered. If you have a clear idea that countries from the Asian region should not be funded by your money, but the auto-invest tool has no options from opting out of loans from specific countries you either have to accept the conditions or invest manually.
Set up Investment Account
Setting up your investment account is the easy step to starting with P2P lending. You can head to my platform overview to select a suitable platform for your investment strategy.
My recommendation if you are new to the P2P lending investment would be to use Mintos. They are by far the biggest P2P lending platform that offers diversification across currencies, loan types, countries, and loan originators.
when you have chosen the platform you are going to use for investments, you have to consider if you can execute your strategy on the platform. This will most likely be a combination of reading reviews and personal experience. Reading reviews can allow you to learn some inside that you cannot find on the P2P lending platforms’ homepage.
Do not get scared when they ask for identification such as a driver’s license or passport. EU located platforms have to apply to anti-money laundering laws that require the platforms to know their customers (also known as the KYC (Know Your Customer)).
Plan, Do, Check, Act (PDCA)
If you are working within production, engineering, or management you might have heard of the method called plan, do, check, act. It is a simple process to ensure that you investigate what you are doing with the right plan, execution, monitoring, and adjusting of the task.
This method is something that I use to invest. It allows me to reflect on my strategy based on the platform I have chosen and whether it is possible to meet my financial goals.
The plan, do, check, act circle is common sense and continuous improvement cycle. Hence, it is not as formal as I describe below. But you should have this mindset when investing in P2P lending.
Doing the planning phase I read reviews of the P2P lending platform to ensure that others have had success with the platform. Then I do my own due diligence check up on financial statements and the management as they are often overlooked topics.
Secondly, I investigate if the options are available to fit my strategy. This could be if the platform offers collateral on the loans, buyback guarantee, auto-invest, etc.
Lastly, I look into my total portfolio allocation and weights the risk of the new platform to my total portfolio to determine the allocation of the new platform.
This is the execution step. This essentially means that you create the investment account, deposit money, set up auto-invest (if it is a part of the strategy), and then invest your money in the loans you seem fit.
Check is the non-passive part of P2P lending. While many advocate P2P lending as a passive investment form (which I mostly agree with), you have to manually check that your returns are calculated to the equivalent of what is projected from your invested loans.
After some time of investing in the new platform, you have to evaluate the data and knowledge gained in the initial investment period. You check if your strategy is returning the wanted profits with the correct amount of risk. Furthermore, you evaluate based on the gained knowledge. If you have learned that your strategy cannot be implemented on the platform you have to adjust or accept.
When you have evaluated your learning outcome from investing on the new platform you will be forced to either adjust or accept. If everyone has followed the plan and you need to take no action.
Whereas if you see something that does not fit your strategy you will be forced to either adjust your strategy or withdraw funds from the platform and find a new one.
Adjusting your strategy or finding a new platform is not a defeat. However, it is a risk mitigator to not lose your money and to follow your financial goals.
Free Downloadable Excel Sheet to Track P2P Lending Income
In my quest to help you get started investing in P2P lending I have created a P2P tracking sheet you can use. This tool will allow you to monitor your investments and will help you in your PDCA process.
You can download the sheet right here.
Through the post, I have shared how investing in P2P lending can be done easily, with a thorough outlook. You will be finding the right platform by looking into reviews of the platforms. This will ensure that you are not signing up for a scam and you will find the personal experience of other users of the platforms.
Developing a strategy to follow when investing is always a good idea, no matter the investment type. I suggest 3 main topics to consider when you are developing that strategy to ensure you have stability and security.
However, choosing a platform and implementing a strategy does not solely lead to a successful investment. Therefore, using the plan, do, check, act method you can monitor the platforms with your strategy to ensure you have a good fit. Furthermore, you can make continuous improvement to both your investment strategy and investment settings so they align perfectly.
Introduction to P2P Lending FAQ
When did P2P lending start?
P2P lending started with the British company called Zopa. Zopa was founded back in 2005 and saw a potential in the market. Zopa has to date issued loans for over £4.5 billion to approxiatly 500.000 UK lenders. Furthermore, Zopa has generated £280 million in interest to the investors.
What is a P2P lending platform?
A P2P lending platform is a middleman between the borrowers and the investors. The P2P lending platforms often has loan originators which issues the loans through the P2P lending platform. Some platforms acts as the loan originator.
Can you make money with P2P lending?
P2P lending is a good way to get double-digit returns. There are easy money to be made as P2P lending can be a very passive investment. An average return on the popular P2P lending platforms such as Mintos or Grupeer is approximately 11%.