Why now it is the perfect time to invest in peer-to-peer lending

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Reza Machdi-Ghazvini,CAIA
Last updated on 17 July 2021

Why now it is the perfect time to invest in peer to peer lending

P2P lending has gained popularity in recent years. Along with the increased demand, the interest of investors to invest in P2P loans has also grown. You might be interested in P2P lending at the moment and wonder if you should invest.

In the following post, we will give you an overview why it might make sense for you to invest in P2P loans right now.

P2P loans have done well in the Corona crisis

For some time now, many crash prophets have been warning of the complete demise of P2P lending as an asset class.

The Corona crisis last year finally brought the long-awaited test. But contrary to what many crash prophets predicted, P2P lending has actually proven to be a very stable asset class in times of rapidly falling stock prices.

Certainly, there were differences between the individual P2P platforms and also from the Grupeer Scam some investors were badly surprised. But, among the established and reputable platforms, scandals and waves of insolvency were absent.

In this context, the critics also like to forget that there are platforms such as auxmoney and Bondora since 2007 and 2009, which have already gone through a major crisis (financial crisis).

In particular, platforms that focus on short-term loans and broker the loans directly or through loan originators (lending companies) have actually benefited from the Corona crisis, in our opinion. While the supply of loans on the platforms declined at the beginning of the Corona crisis, this shortfall was more than made up within a very short time.

In our opinion, many platforms proved at the beginning of the Corona crisis that they are reputable and will profit from this in the long term.

Savings accounts and call money accounts still offer no interest

The current base interest rate remains at a very low level. Your savings accounts and call money accounts (continue to) offer you no interest. The interest rate on traditional savings products continues to be well below inflation, so savers are losing money every year.

However, the expected interest rates on P2P loans should not tempt you to invest all your money from your savings and call money account into P2P loans.

P2P lending is much riskier. Before you invest in P2P loans, you should definitely familiarize yourself with the opportunities and risks of P2P loans.

However, it may make sense to invest some of your savings in P2P loans - depending on your risk profile 10% - 20%.

Are you a particularly risk-averse investor? Then you should focus on P2P platforms that broker their loans themselves or through loan originators (lending companies). These are, for example, the platforms Twino and viainvest. Both platforms have also done well to very well during the Corona crisis.

If you are looking for maximum diversification of your capital, you should take a look at Bondora Go & Grow. With the investment product Go & Grow, you invest in a loan portfolio that consists of thousands of loans.

P2P platforms are (now) very transparent

P2P platforms are (now) very transparent

P2P platforms are modern companies that use modern digital technology to make it as easy as possible for you to invest in P2P loans. Over time, the platforms have also evolved and now inform their investors very transparently about all details of the loan brokerage. Also, the regulation of crowdfunding platforms (ESCP) adopted by the EU defines minimum standards that will lead to even more transparency.

Most P2P platforms have understood the importance of transparency, as platform risk is relevant for investors. Fraudulent platforms can cost investors a lot of money and damage the P2P lending asset class in general.

As a potential investor, you have the opportunity to get a good impression about the platform in advance. Most platforms report, for example, on their blog and on their websites in great detail about how the loan brokerage is developing.

You should stay away from non-transparent platforms. A key feature of fraudulent platforms is the deliberate concealment of information.

A good example is the statistics page of Mintos. Mintos reports on its website in great detail about which loans are in default or have even defaulted. You can also find information about which loan types are currently offered by which loan originators.

With this information, you can better evaluate the platform and prove its seriousness.

Most P2P platforms with secondary market

P2P secondary market

In the past, secondary markets where investors can sell their P2P loans were rather the exception. Thus, the availability of the invested capital was a major problem for many investors.

Almost without exception, the largest 5 P2P platforms now offer secondary markets that allow you to quickly exit your P2P loans, provided you find a buyer.

Another advantage of secondary markets is the ability to buy loans there. Also, you may be able to get a bargain on the secondary market. The big platforms like Mintos, Bondora, EstateGuru or Twino all offer a secondary market.

On platforms that only offer short-term loans, such as Robocash, you will not find a secondary market. Due to the very short terms of maximum 30 days, it is also questionable whether a secondary market would have a great benefit for investors.

Fewer or virtually no fees

Fees have a direct impact on the return of your investment. This is of course true for P2P lending as well.

Most P2P platforms do not charge investors any fees. 

You can invest with almost all major platforms without (direct) fees affecting your return, which also makes P2P loans an interesting asset class for you.

Conclusion

P2P loans have gained more and more popularity as an asset class in recent years and were able to do well in the Corona crisis, disappointing many crash prophets.

Many P2P platforms have been able to establish themselves in the market and have proven their seriousness. Savers can use the loans offered to earn interest on at least part of their savings.

But, P2P loans are not to be compared with classic savings products. Before you invest in P2P loans, you should know the opportunities and risks. Our guide to P2P lending gives you a comprehensive overview of what you should know.