Disclaimer: A P2P platform that is not licensed or regulated is always going to be a high-risk investment. Take everything I say with a grain of salt.
What Is Crowdlending Or Peer-To-Peer Lending?
A crowdlending or peer-to-peer lending platform is an intermediate entity that handles investments between borrowers and lenders.
It is a reliable way of receiving high amounts of passive income while benefiting from the power of compound interest. The secret is to be patient and think of long-term goals.
The first platform going online was Zopa back in 2005. Since then, many others have appeared and the business model is constantly improving and getting safer for everyone involved.
Why Is It Good For A Borrower?
Usually, banks do not offer friendly interest rates to their borrowers. If you’ve asked for a loan to your bank, you probably know what I’m talking about. The bureaucracy process might also not be the fastest.
Crowdlending platforms are accelerating the process a borrower can receive the money. They usually also provide lower interest rates compared to banks.
Due to these two factors – agility and lower taxes – peer-2-peer platforms are becoming more and more popular for borrowers.
Why Is It Good For A Lender?
The main reason is the annual net interest the lender can receive. If chosen well, this kind of platform’s interest rate varies between 12% and 16%. This value is way higher than the usual 1% or less given by the banks.
No, it is not safer than a bank, but there’s where it enters diversification. The increasing number of these companies is making it possible to spread across multiple platforms the money we wish to invest in. This obviously means more security because if something goes wrong you’ll always have other backups. This is why it is so important to choose the right companies.
Why Is It Good For The Platform?
The platform usually receives a small fee from the borrower per loan. And the number of borrowers seems to be growing year after the year.
There are still a lot of people without a decent knowledge concerning money management. If this trend continues, this means the business will continue growing at a steady pace. Thus, the platforms will have profit and survive unless a really bad decision is taken.
How Do Crowdlending Platforms Work?
In essence, crowdlending platforms’ purpose is to collect money from different investors and lend it to a borrower’s loan.
I will use the example of Mintos to explain to you more succinctly how everything works.
It all starts when a person (the borrower) needs money to invest in something. It can be in a lot of different things such as mortgage loans, car loans, short-term loans, personal loans, business loans, car loans, etc.
There can be Peer-to-Peer (P2P) or Peer-to-Business (P2B) models. The first one is a business-like model like Mintos, Swaper, Robocash, PeerBerry, Iuvo Group, Lendermarket use. The latter is Crowdestor’s way of working.
In the P2P model, there are loan originators, also known as, banks or microfinance services. The banks ask the crowdlending platforms about money so they can lend it to the borrowers.
In both of the models, lenders are the crucial piece of the puzzle. Without them, the borrowers can’t have the money they’re asking for and everything falls apart.
Some of these platforms have a buyback guarantee feature. If the borrower denies paying, you’ll always receive your money back plus the interest you have already received.
In the worst-case scenario, a loan originator can go bankrupt. It is up to the platform to take the necessary measures to get your money back.
That’s why legislation to Crowdlending is so important. To know what happens in situations like these, and how it can be prevented.
Since time is limited and is the most precious thing you have in life, it is of great importance to have good habits.
The auto-invest strategy comes in handy at this point and most platforms are adopting it. In it, you can configure all the options for your type of investments. Everything will work automatically and you’ll not need to worry about it. Although, it is always good to keep an eye on your account and make sure all of your money is being reinvested and not idle.
The options available vary in the platform you’re using. The most common settings are the interest rate return you’re expecting to receive and the loan’s duration. In some, you can even choose options such as diversify your investments across loan originators, not invest in loans already invested in, etc.
What If You Need To Get Your Money Back?
Not all, but most of the crowdlending platforms have the option to sell your loans to other investors in the secondary market. Sometimes you can even activate the guarantee and get your money back. It may not be immediate, but you’ll have most of your money within days.
If you’re not into long term goals, you can always choose to untick the option of reinvesting in your investment strategy. Like this, the payments you’ll receive from your loans will start being available in your account.
Why Should You Invest In Crowdlending?
If like me, you have the dream to achieve financial freedom, then crowdlending is one of the best options out there, if chosen carefully.
See my peer-to-peer portfolio page if you want to find out more about my portfolio performance.
Or take a loot at my reviews:
- Raize review
- Kviku review
- Mintos review
- Swaper review
- PeerBerry review
- Robocash review
- Iuvo Group review
- Crowdestor review
- Neo Finance review
- Lendermarket review