Do you wonder if P2P lending is something for your portfolio? Maybe just considering if P2P lending is a good investment? I will try to give you an idea of why you should invest in P2P lending.
Investing in P2P lending is very easy and has a very low cost of entry. Most platforms take no fees. P2P lending easily generates a stable 10% return, which can return even more based on your risk profile.
Based on those factors P2P lending is very appealing. So why should you invest in P2P lending?
P2P Lending – Infographic
Here are the main overview of why you should invest in P2P lending!
P2P Lending has High Returns
P2P lending has very high returns compared to many other investment vehicles. The average S&P 500 index return is 7,96%. The average historical return on real estate is 7%. The average return for bonds is 5,4%.
So what should you use all these percentages to?
The average return on the P2P lending platform Mintos is 11,87%. While this is just the performance of 1 platform you can see my returns in my monthly income statements where the returns are between 10%-21%.
Setting up “safe” automated loan investing can easily yield +12% with little to no risk. Personally, I have not experienced a default which turned into a loss of my funds.
The returns is always reflected in the risk in some way or another. When you get offered a high return, you are often exposed to a high risk. This is also the case with P2P lending. I have made an extensive article on the risks of P2P lending. If you want to understand the risks of P2P lending and how to mitigate your risk when investing in P2P lending read this article.
Your Financial Goals
The financial goals each individual has vary a great bit. Some just want to invest the mandatory amount in their pension accounts. Some want to retire early, hence investing everything in different investment types. And some just want to earn a little on the side of their 9-5 job.
Despite your financial goals, P2P lending is a good opportunity to generate a higher return compared to other investment types. Whether you invest 5% or 100% of your portfolio in P2P lending is dependent on your risk willingness. If you are close to retirement or soon need the cash, the less you should have in risky investments.
I have about 50% of my portfolio in P2P lending. My goal is to be financial independent at some point. Using P2P lending has yielded the best return for me so far, hence the large portfolio allocation.
Long Term Investment Strategy
The long term perspective of P2P lending is great for accumulating interest over time. Using the rule of 72 you can estimate how long it takes before you double your investment.
The rule of 72 is simply the equation: 72 divided by your expected return. E.g. an 6% expected return would be 72/6=12. The result is in years, meaning that it would take 12 years for your 6% return to double your investment.
|The rule of 72||Average return||Years to double investment|
|P2P lending||11,84%||6 years|
|Real estate||7%||10,2 years|
What you can see from the table is that you can double your investment in just 6 years, compared to 9 years when using the stock market.
P2P lending can get you ahead compared to investing in bonds which many pension funds do. P2P lending compound much faster, has lower/no cost of entry and has no fee associated with investing.
One of the most risky aspects of P2P lending the lack of historic testament. P2P lending was first introduced back in 2004 by the P2P lending site ZOPA. One of the two P2P lending sites that has experienced a recession (2008-2009) ZOPA managed to provide investors with a positive return during the recession.
Since the fall of the banks in 2008-2009 P2P lending has exploded.
This could mean that the P2P lending market is saturated and a coming recession could hit the P2P lending industry hard. While ZOPA delivered a positive return on investment during a recession does not mean that another recession will yield the same result.
This could impact your long term investment strategy. In contrast to the stock market where the majority of stocks simply lose value during a recession, P2P lending could result in the loss of funds if the borrowers are unable to pay.
Selecting the Right Platform To Invest With
One of the most essential aspects of investing in P2P lending is selecting the right and best P2P lending platforms and loan originators.
Using the different platforms’ own statistics and track records can be a great help at finding the right platform for you.
It can be difficult to select the best platforms and loan originators. If you are on Mintos or Estateguru you can read through guides to selecting the best loan originators on Mintos and the best projects on Estateguru.
Selecting the right platforms can be more difficult. However, looking into a full overview of the P2P lending platforms can help you. You can also read individual reviews of the platforms to understand and learn the platforms. There is a lot of very good platforms, and they are typically very easy to use.
Read reviews by P2P lending bloggers who go into detail, such as financial statements and the team behind the platform.
You can read all of my reviews here.
P2P Lending is A Stable Investment
P2P lending is a very stable investment vehicle. There is no ups and downs like the stock market. Looking at my portfolio value page under P2P lending, you can see the average returns range between 10%-16,5%.
There is a number of reasons why P2P lending is a stable investment vehicle:
- The setup of the investment type
- Security of funds
- Replicating the banks
The three main elements as to why peer-to-peer lending is stable is based on the setup of the loans, the security provided to the investors, and the replication of a known successful investment form.
The Setup of the Investment Type
P2P lending is as the word suggest people lending money to other people. Hence loans, just like you know it from the banks.
The reason loans are stable investments is due to the setup of the loan. When you lend €1.000 (known as principal), they will be paid back over a period of time in increments with interest. This means that you will receive the same amount from your investment each month.
Loans do not appreciate in value neither do they decrease. A loan is set to a fixed amount (the principal) and will be paid off with interest over a period of time.
Security of Funds
P2P lending platforms is a business. Therefore, they want their customers (the investors) to be happy. One of the ways, P2P lending sites makes the investors happy is through the security of their funds. Here I am not talking about guarding a bank account.
The security of funds I am talking about is secured debt, buyback guarantees, and personal debt guarantees.
The security of funds is an initiative for the platforms to attract more investors, as the investments are more safe. These initiatives are a proactive approach to make the investor feel safer.
Loans Secured Debt
The best way to secure loans is through secured debt. This can be secured debt in the borrowers’ mortgage. It could also be secured debt in a borrower’s asset, such as machinery or inventory. When the loans are secured in assets, the lenders are more interested in the value of the asset rather than a future promise of repayment. This allows the loan to be repaid in the case of a default.
If a loan is to default while having the loan secured by collateral, the lender will seize the collateral, sell the collateral and then repay the loan to the investors.
This also opens for the discussion of ethics in the P2P lending industry. If a borrower has collateral in their house and fails to repay the loan they can lose their house to the lending authority.
This is unethical in the sense that you can indirectly be a part of putting people out of their homes (remember the borrowers have to actually default before such drastic measures are taken into action). In contrast, this is how the normal lending industry works. So you won’t be contributing to something that isn’t already happening.
Buyback guarantee is another way to secure loans against defaults. A buyback guarantee is when a loan originator offers to repay the full amount if the borrower defaults. The buyback guarantee is by some offered with accrued interest. This means that if a borrower defaults, the loan originator will repay the principal plus the interest which has accrued over the loan period.
Buyback guarantee does not mean you are safe from losing money. A buyback guarantee is good when the issuing loan originator has a positive cash flow, hence they have money to repay defaulted loans.
However, if a loan originator is in bad financial standing they cannot repay the defaulting loans, hence you will lose your money.
Replicating the Banks
Another reason to invest in P2P lending is that the banks have issued loans in decades with great success. P2P lending has just offered this multi-billion industry to the average investor.
The banks’ issues one big loan funded by their customers deposited money. P2P lending lets investors buy partial shares of loans. This allows for a high degree of diversification and for the ordinary investor is earn the same high yields as the banks.
The banks have been running this business model for a very long time and will properly keep going. However, giving the power back to the people, everyone can get a piece of the pie, instead of the banks solely profiting all the high yields.
Beat Other Investment Types
As highlighted earlier, the return on investment is highest when using P2P lending. While there is pros and cons to each investment type P2P lending is the most passive, best compounding, and highest yielding.
One of the main benefits of P2P lending is the often offered “auto-invest” option. The auto-invest option enables the investor to automate their investing, customizing your settings to whatever you prefer.
One of my favorite reasons to invest in P2P lending is the fact that you have thousands of ways to diversify your investments. Whether you chose a platform like Crowdestor which releases a couple of loans per month, or you chose a platform like Mintos which has +200.000 loans which you can invest in, there are a lot of ways to diversify your investment.
Automation, Known as Auto-invest
The automation of your investment is of the essential moves to start consistently saving money.
The “step-by-step” is very easy.
- Make an automatic transfer from your bank account to your investment account (the pay you get the paycheck)
- Have set up and auto-invest which invests your money upon arrival
- Enjoy the profits from your automated P2P lending investments
The first step is the most crucial to get started for most people. Especially if you are in a lower income bracket. Using the automated transfer, the money will have left your account before you can use them on dumb shit (excuse my french).
The second step involves setting up an account with a P2P lending site. My advice would be to use Mintos. No matter if you are a beginner or an advanced user in P2P lending, Mintos is a most have. Setting up the auto-invest is very simple and easy and takes less than 5 minutes.
Once you are done and have set up the automated transfer you are ready to enjoy a compounding interest.
You can learn how to set up the auto-invest here.
If you want to know more about P2P lending platform Mintos you can read my detailed review here.
The diversification that can be reached with P2P lending is to some extent like the stock market.
You have the possibility to issue loans for different industries, businesses, countries, currencies, loan originators, loan-to-value rating, and much more.
Diversification can be done by using multiple platforms, but can most certainly also be done through the individual platform themselves.
Why You Should Invest in P2P Lending – Conclusion
There are many reasons to invest in P2P lending. One is that you can have very high yielding returns. Another is that you can diversify so easily it seems to good to be true. The third reason is that it beats other investment vehicles should have stocks and real estate. Not only is P2P lending higher-yielding, it is more passive and it can be automated.
If you are not tey convinced on why you should invest in P2P lending as well, you should visit my monthly income page to find my earning and estimated returns.
If you have any questions on how to get started or any doubts in general, I would be happy to answer your questions below!