So, a person comes and wants to get a loan, the platform evaluates his credit score and if he is “credit worthy”, an offer for people to invest appears.
Based on the credit score, an interest rate for the loan is assigned and you can decide whether you want to lend your money to that person or not.
I imagine the P2P platform as a small bank that issues loans, but instead of financing them with its own capital, it uses the capital of registered investors.
How The Platform Makes Money
Disclaimer:There are hundreds of P2P lending platforms and their business model can differ. I try to generalize it as much as possible.
The borrower fee. The platform can take their fees from the borrower, usually, a flat fee to cover the paperwork and credit score analysis costs, but there can also be a fixed percentage fee on all the payments.
The investor fee. The platform can take their fee from the repaid interest on the loan.
It can be a mix of these two fees with different ratios. It really depends on the platform and you should learn about the fee structure of a particular platform before investing.
There can also be a secondary market fee. Will talk about secondary market later on.
The platform can also invest its personal capital into loans and earn interest rate.
What’s The Platform Responsible For?
The platform is responsible for issuing loans and evaluating credit score. This is the main business of the platform and for this service, you as an investor are paying the fees.
Also, it’s responsible for collecting payments and if a loan is overdue to recover the funds through legal manners. Usually, separate law firms are hired for this.
All that’s left for you is to evaluate how much risk you want to take and invest your money accordingly.
What Returns You Can Expect From P2p Lending
Disclaimer #2:There are no guarantees in investing, you can make money, but you can also lose money.
Realistically, you can expect to make 10%+ a year. Your returns depend on the loans you invest in.
If you would invest only into loans with the highest credit score, you would minimize your risk and could expect to make 5% yearly.
If you are more risk tolerant you can find loans that pay 30% interest rate with a low credit score, but of course these loans have higher default rates and your net profit will likely be 15% or higher if you are really good at picking loans.
Some platforms allow you to pick the loans that you like, others invest automatically on some set risk criteria. Even though it takes a little bit more time to invest manually, but I like it much more because of that extra control.
You can also find loans with 200%+ yearly interest rate, but from my personal experience, they yield negative results, because the default rate is so high. Will, talk about this a bit later as well.
Loan Duration and Secondary Market
In most platforms, you lend out your money anywhere from 6 months to 5 years. So, it’s a long term investment, but it doesn’t mean your money is locked up for all that time.
If you want you can sell out your loans in the secondary market to other investors. You can even do some arbitrage and try to make a few percent here and there by flipping loans.
Depending on the platform and how many people are using it, the time to sell a loan can vary. Usually, if you are not in a rush to sell you can earn a few percent profit, but if you want to sell quickly you will most likely need to sell at a discount.
Also, be aware that some platforms might have secondary market fees, they can have an impact on your profits, if you have large sums invested.
My Experience With Bondora
I learned about P2P lending from a local investors group and Bondora wasn’t the first platform where I invested in, I decided to try it out after having some really great results with a different platform that I will talk about in a bit.
My appetite for risk grew too much and after I found out that on Bondora you can find loans with 200%+ yearly interest rates I just had to try it out.
I deposited 100€ and got a 5€ sign up bonus. Usually, in other platforms loans have ratings that go as follows A, B and C being the highest risk some also have the D rating, but in Bondora it doesn’t end there, E, F and HR rating loans are also available.
Bondora is also one of these platforms where you can’t pick the loans you want to invest in. You pick the yearly interest rate that you want to earn, the maximum you can choose is 25%. Recently, they did release a new portfolio manager, but it wasn’t available when I started.
After several months of reinvesting into new loans, my portfolio looked like this. The biggest percentage of loans being in HR rating. Please disregard the profit calculations, because I have no idea what kind of formula they are using.
As you can see in the chart the planned payments were half of what I actually received and all the loans above C rating were not paying I slowly came to a realization that I’m not going to get those 200% yearly returns…or 25%…
I did some Google searches and people weren’t too positive about Bondora, it wasn’t the first time when I jump into something without doing proper research.
So, I decided to abandon this platform and sold most of my loans in the secondary market. Several loans that were A and B rating I managed to sell for a couple percent profit, but the majority of the loans I had to sell for a discount because the payments were already late.
I managed to withdraw 61€ and I’m still stuck with these loans:
As you can see for some of the loans the late charges are already as much as the original investment. I hope the recovery process won’t take too long, there isn’t any info about that on Bondora other than a statement that it has started:
If 50% of the loans were recovered with all the late charges I might even be in profit but will see how that goes.
All in all, I didn’t like Bondora, it can be profitable, but there are too many bad loans. After, they released the new portfolio manager you can select better loans, but still, I don’t like that you can not evaluate loans one by one.
My Favorite P2P Platform
I’m not writing this to advertise a platform that I use, I don’t get anything from them and there’s no affiliate program, I just want to show you how a proper p2p lending platform operates.
If you want to check it out it’s called www.paskoluklubas.lt. It’s issuing loans in Lithuania. Recently it opened its doors to investors from around the world.
The main reason why I like it so much is that it’s local and I did see the co founder in a seminar and a small part of the team, also they are active in a private P2P Lending group. I would highly recommend investing in local platforms if possible.
So, how why is Paskolu Klubas or PK so, great in my opinion?
There are no secondary market fees, what you see is what you get. If you sold a loan for 2% profit, then you will get exactly those 2%.
There’s a buyback guarantee on defaulted loans. If a loan defaults PK offers to buy it from you for 50 to 80% of the invested amount. The whole recovery process gets described in great detail in every step.
There are only 3 loan ratings A, B, and C. All other loan applications get rejected. C rating loans are risky enough in my opinion.
You can hand pick your loans. Every loan has information about the person who is taking the loan:
You can check its rating, personal information, assets, income and liabilities and even debt history. You have plenty of information to evaluate the loan for yourself and not blindly invest only by the letters A, B or C.
Sure, if you have a huge capital and very little time, then you can invest using an automatic portfolio manager.
PK takes its fees from investors only when the loan is fully paid out. This means they are interested in issuing loans that won’t default because otherwise, they won’t collect their fees.
They are also investing their own funds in some loans. All their investments are transparent and marked with a special sign next to a loan:
Lastly, it has an overdue payment fund, which you can use to lower your risk. When you invest in a loan you can choose to activate it and pay a fee to the fund, which ensures payments on time and if the loan defaults you get 100% of the invested amount back.
The fund obviously lowers your returns, but it’s a really good thing for people who want to invest safely for example if you are saving for retirement, you could still be looking at 5% or more yearly returns.
I might be biased, but PK to me seems like years ahead compared to Bondora.
How To Get Started
It’s really important to have a plan in mind. How much risk are you willing to take. If you are saving for retirement and want a safe return, then only invest in A rating loans.
If you are looking for the best risk rewards ratio, based on the info that PK has published, invest in B rating loans.
Why is that? The interest rate percentages are rather high and the default rate is kind of low, thus making the best returns.
Strangely C rating loans have a higher interest rate, but the default rates are so high that overall the returns are lower than B rating.
My personal strategy is to mainly invest in B rating loans, but I also look for A rating loans with high percentages and also at C rating loans that have a really good financial situation. Also, I’m not too afraid of defaulted loans, because according to PK they recover more than 60% of the loans.
Once you have a strategy in mind you also need to think about how much money you will be investing. Do you want to make a big one time deposit or will you be saving some out of your salary and invest monthly?
Also, are you planning to reinvest or will you just let the money sit there after initial investing?
I highly recommend reinvesting, because you are tapping into the power of compound interest, which can do wonders over long periods of time.
Lastly, it’s time to Google for a platform to invest in. I would start locally, but there are also plenty of international ones that can be just as good. I don’t want to do any recommendations because I have only tried two of them myself.
I did list out what you should be looking for in a platform, the fee structure, the platform functionality and so on.
Do careful examination before you invest and if you are coming with a huge sum at once, take the time to familiarize with the platform and start out small.
Wrapping It Up
Investing in P2P lending is a really great opportunity. As with any investment, there are risks of losing money, but it’s possible to make 10% or more yearly. If you are an active investor 10% might not seem like a lot and might not be for you, but if you are a passive investor then getting more than 10% is rather unlikely with other types of investing.
Why I like P2P is because you can automate the whole process and get decent returns. If you would want to make similar returns with stocks it would take a lot of learning and also a huge time investment to analyze companies.
Are you investing in P2P loans? Do you want to start, but you are still on the fence? Let me know in the comments below.