The concept of peer-to-peer lending in Europe is quite simple. On the one hand, an investor would like to lend through P2P lending platforms, on the other hand, a borrower.
The P2P platform then acts as an intermediary that connects supply with demand, ensures the administration of the loan, the transfer of money between the lender and the borrower, and collects a fee from both of them.
P2P investment is a modern way of capitalizing on savings and has great potential for the future, but it is already widespread in most countries of the world and has many supporters.
As with any financial decision, there is some risk involved with peer to peer lending platforms. Borrowers and lenders alike must be aware of the risks associated with this innovative way of obtaining financing and how they can minimize these risks.
As those who fund the loans, lenders face the most risk. The most obvious risk for lenders is that borrowers will not pay the money back. With rare exceptions, there is never an absolute guarantee that the lender will get all of his or her money back when he or she makes a loan.
A careful examination of any available data about the borrowers and their financial situations will help you select low-risk borrowers. Using a third-party company or website that has some sort of vetting process for its borrowers can also help you separate those who are likely to repay their loans from those who are likely to default.
Most peer-to-peer lending sites and marketplaces in Europe provide unsecured personal loans or P2P business loans, meaning there is no collateral to back the loan. Platforms use an extensive analysis of each person and small business that applies for a loan taking into account many factors the likes of monthly income, are they homeowners or not, debt history, credit card payment history,….etc.
By analyzing these factors they create a risk profile and based on that they decide if the applicant gets a loan and for which interest rate.
High-risk peer to peer loans in Europe offer retail investors high interest rates but at the same time, they have a high chance of defaulting. A borrower is said to have defaulted when it fails (for any reason) to meet its repayment obligations – such as missing a monthly repayment installment.
Default rates are generally used to measure the average rate at which borrowers are expected to default across a given peer-to-peer investment platform. Default rates are generally derived from historical data and therefore cannot be used to predict the future default rate of a platform with any certainty.
As there is no collateral this can mean that an investor loses his invested/lent money. By diversifying your loans over many different loans with varying risks you can lower your risk…and this is what most investors do.
When Mintos platform entered the European market lending industry they decided to offer secured peer to peer loans. Up to that moment, this had not been done on a large scale yet in the P2P lending market. And Mintos, therefore, created a great new addition to these loans.
Buyback guarantee secured P2P loans will net you, as an investor, less interest than unsecured loans, but it will greatly reduce your risk, as Mintos loan originators will buy back the loan whenever the borrower defaults on his payment obligations for 60 days or more. In such a situation, the loan is automatically bought back by the loan originator from the investor at the nominal value of the outstanding principal, plus accrued interest rate.
This is a great system that greatly reduces your risk.
By investing in peer-to-peer lending in Europe you will gain more money than if you were investing on a saving account in a bank. Saving accounts are still below the inflation rate in return. That is, while your money is in the account, it loses its value. Investing in P2P loans can thus be a lucrative alternative to traditional low-interest investments.
P2P credit platforms promise returns above 10%. The high return rates investors can make on p2p lending platforms are understandable if you look at the loan services they compete with. Payday loans, micro loans, online loans all charge super high annual percentage rates to their borrowers. Peer to peer Europe lending platforms offer these loans too but at much lower percentages due to their low cost structure.
Basically peer to peer platforms cut out the middleman aka the payday/micro/online loan provider by bringing borrowers and investors directly together through their platform/marketplace.
By doing this p2p lenders don’t need to have money at hand themselves which greatly reduces their costs. Their core competence is the platform technology and loan approval automation. By charging small fees (typically around 1%) they can create a highly profitable business that is beneficial for them, the borrower and lender.
With P2P finance. You are also getting interest and principal payments for each loan every month. This interest is added to the principal of a deposit or loan thus the extra interest brings more interest. This increase of interest is known as compounding. In comparison to simple Interest at which just the original capital earn interest, the compound interest gives more advantage for Lenders.
The low minimum investment makes diversification easy. The social lending character implies that you must construct a portfolio of hundreds of loans at which each loan is a small percent of the total portfolio.
Being diversified across several loans and platforms is among the secrets to having a successful experience when investing in social lending. Like other investments, diversification will lower the possibilities of your investment returns volatility.
This strategy will provide you more stable returns on your investment and lower your exposure to the risks associated with platform and any individual borrower defaulting on their loan. With this simple strategy, you can normally achieve a consistent return of 8 - 10%.
If you feel that it is time to let the money earn themselves, investing in loans might be the right option for you.
Of course, there are plethora of European P2P platforms and it can be difficult to navigate all of them. Fortunately, some are already verified by a large number of users and are therefore very widespread internationally.
European portals listed below provide higher returns, better tools and “security” in the form of a buyback guarantee. The minimum investment amount is 10 Eur. It is worth a try. You will learn along the way!
You must invest a minimum of 10 euros per project. You can expect to get a return of between 11 and 12% per year on your investments.
Another thing worth mentioning is that Peerberry also offer buyback on their loans, but they do not have a secondary market on which to sell the loans. If necessary, since most loans only have a maturity of 30 days, you just have to stop reinvesting your money and after 30 days you have all your investment back in your account again.
Of course there is the possibility to use the AutoInvest function (the so-called automatic portfolio manager), which can make your work easier in many ways.
Fast Invest is the European platform that has the highest average return of as much as 14% per year in their loans. Investors across Europe can invest in the platform and today Fast Invest have 30,000 users and branches in the UK, Poland, Lithuania and Italy.
What makes Fast Invest unique is that they offer risk free interest rate up to 14% and with a buyback guarantee. In addition, they do not have a secondary market, but instead a different function that no other crowdlending platform has. At Fast Invest, you can sell your loans back in just 3 days, which means that you can get your investment released again very quickly.
Mintos is the largest and probably the most popular marketplace for P2P loans in Europe. In April 2019, the platform surpassed the threshold of 130,000 registered investors and EUR 2 billion in lending. All this with an average appreciation of about 11.77% per annum per investor and without fees.
The marketplace is constantly expanding and investors can successfully diversify within a single portal. Currently 8 types of loans are available from 28 different countries. These loans are broken down by currency into 12 different marketplaces.
On Mintos, two markets are available for each currency - the primary and secondary markets. Here you will find both short-term and long-term loans.
While the primary market is a place to buy first-hand investments (directly from providers), the secondary market is a place where investors can sell their shares to other investors - either at a discount or for an additional fee that can be the profit of the seller .
The secondary market has a positive impact on liquidity. If an investor needs to sell their shares early, they can offer them on the secondary market and convert them back into cash quite quickly. Mintos does not charge any sales fees.
Within Mintos, an investor can hold participations in up to 12 different currencies. Each of these currencies behaves separately as a form of account.
There are two types of guarantees on Mintos:
Grupeer started in 2016 and opened for the first investments in 2017. Grupeer is very similar to Mintos, where you invest through loan orginators (lenders) and where all the loans are collected on the platform. There are more than 13,000 investors in Grupeer from more than 80 different countries.
Grupeer provide a buyback guarantee on their loan, and you can expect to get a return of up to 14% per year on average. If you make large investments with Grupeer (2000-5000 Euro), then you can expect between 1 and 2 days before all your money is invested, as there is a great demand for the various loans.
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Other platforms in Europe offer different types of protection schemes to reduce the risks of bad loans. Here are other important protection types:
This means that if a borrower defaults, the lender will be able to claim the collateral (e.g. property or vehicle) that the borrower has provided. If the borrower does not repay their loan then the collateral can be sold to cover any shortfall.
Collateral may be real estate in the case of a mortgage loan, a vehicle in the case of a car loan, or equipment in the case of a business loan, as well as many other types of collateral, as indicated under each loan.
When there is a collateral securing the loan. A loan to value (LTV) ratio is a number that describes the size of a loan compared to the value of the asset securing the loan. A higher LTV ratio suggests more risk because the assets behind the loan are less likely to pay off the loan
For certain loans (e.g. business loans), other credit enhancements are obtained, such as a personal guarantee. It includes, for example, real estate objects, cars, company assets or shares, personal guarantee or third-party guarantees.
Some platforms operate internal reserve funds, which are designed to protect the lenders against losses in the event that a borrower defaults on their repayment obligations. Reserve fund sizes and their terms vary between platforms. Reserve funds are not compulsory and there are no guarantees over their effectiveness.
Short-term loans investments are more liquid or reachable in the event you want your cash. As soon as you have invested in loans, you will begin receiving payments on your account within 30-45 days. The moment your balance goes over minimal investment amount you may invest your money in new loans with auto invest feature.
Auto Invest enables users to make customized Filter and invests their funds in loans based on their standards automatically. Auto Invest feature saves time and effort. Before this feature is introduced, lenders were required to invest manually and often assess the status for new investments. The tool simply invests available funds on the loans, reinvesting whenever possible. The Auto Invest feature could be stopped and re-triggered at any time.
Auto Invest is a very effective tool for saving time spent on investment activities. It also allows you to access newly placed loans in the system before manually made investments.
One of the problems if you decide to invest in long-term loans on peer 2 peer lending sites is that it is hard to turn around and sell them if you need the cash you've invested.
The Secondary market is where investors can place their investments for sale to other registered investors. Secondary market allows lenders to cash out loans early. To do this a lender simply sell his loans at Premium or discount. Investors can exit their investments by selling the remaining loan to another investor.
However, a successful sell-out requires both a willing buyer and willing seller and there are no guarantees that a buyer will be found. Where a buyer is found the selling lender may need to take a discount on the value of the loan at the point at which they wish to sell-out. Platform fees may also be applied on any loan fractions traded, on the part of the buyer, the seller, or both.
Some marketplace lending platforms are open to international investors depending on which country you reside in or which citizenship you hold. Don’t be afraid of investing overseas. Investing abroad provides increased diversification of risk and can offer higher returns.
Within peer-to-peer investing, diversification of risk is the concept of spreading loan capital across a large number of different borrowers, platforms and location, in order to minimize the impact to the lender of any one borrower defaulting on his or her repayment obligation.
In some crowdfunding platforms, you are qualified to invest if you have a bank account in the SEPA region or third countries currently considered to have AML/CFT systems equivalent to the EU. If your bank does not use SEPA transfers. With Transferwise borderless account you get instant international bank details to receive money from over 30 countries around the world with zero fees. That means you can transfer money or get paid from the UK, the US, Australia, and any country in the Eurozone, and no one pays any fees.
Some P2P platforms like Fast Invest or Mintos in Europe offer loans conducted in different currencies to protect investors from currency risk. This functionality allows investors to choose the currency that they want to invest in. In addition, every transaction is processed in the chosen currency (including deposits, withdrawals, investments, repayments, etc.).
Peer-to-peer lending platforms charge a fee for investors. Fees reduce the value of your investment. Over time, even ongoing fees that are small can have a big impact on your investment. When researching for a P2P lending site be sure they didn’t charge high fees.
Alternative funding has gained worldwide popularity, becoming increasingly widespread in Europe as well. While it has many faces, the largest share of it is funding using the so-called peer-to-peer (P2P) platforms.
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