€300 passive income every month with peer-to-peer lending

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Reza Machdi-Ghazvini,CAIA
Last updated on 14 September 2021

EUR 300 passive income with P2P lending

Passive income has become a standing process in recent years, as more and more people want an additional monthly income. Perhaps you have also read up on how you can build a passive income. We would like to introduce one possibility  to you today: P2P lending. If you have already dealt with P2P loans, you have probably noticed that the double-digit returns of P2P lending make the asset class for a passive income particularly exciting. You can earn a high passive income even with relatively small investment amounts.

However, it can be a bit of a hassle to build up passive income with P2P lending, as many auto invest features of the platforms usually reinvest the interest.

In this article, we would like to explain to you how you can build a passive income with P2P lending and show you two concrete procedures how you can achieve a passive income of €300 per month.

High-interest payments of P2P lending

The high-interest payments of P2P lending make the asset class for a passive income so interesting. For example, if you compare the interest payments of P2P loans with dividend payments of stocks, you can see that the interest payments are sometimes double or even triple.

This makes P2P lending very interesting in terms of passive income.

You can already generate a high regular income with small investment amounts.

Examples of passive income from P2P lending

Before you build up a passive income with P2P loans, you should get a first feeling for how much capital you need. Due to the fluctuating returns of about 5% to 12% p.a., the amount of your passive income varies a lot.

Example 1: You invest €5.000.

In this example, we assume a return of 5% and 12% p.a.

  • At a return of 5% p.a. this corresponds to €250 per year and about €21 per month.

  • At a return of 12% p.a. this corresponds to €600 per year and approx. €50 per month.

Example 2: You invest €10.000.

Here, too, we assume a return of 5% and 12% p.a.

  • At a return of 5% p.a. this corresponds to €500 per year and approx. €42 per month

  • At a return of 12% p.a. this corresponds to €1,200 per year and approx. €100 per month.

Example 3: You want a passive income of €300

To generate a monthly income of €300, you need €3,600 per year.

  • With a return of 5% p.a. this corresponds to an investment amount of €72,000.

  • At a return of 10% p.a. this corresponds to an investment amount of €36,000.

  • At a return of 12% p.a. this corresponds to an investment amount of €30,000.

The examples show that the amount of the return has a decisive influence on the amount of your required capital.

Set up the automatic investment function correctly

P2P lending - Set up the automatic investment function correctly

The automatic investment function makes it easier for you as an investor to control your investments in P2P loans.

You do not need to actively select and manage P2P loans. The auto invest function will do that for you. However, in some auto invest functions, the default setting is that the interest is directly reinvested and there is no option to disable this. This makes sense if your goal is to increase your wealth because you use the compound interest effect.

However, if you invest your money in P2P loans with the goal of generating passive income, you have to turn off the reinvestment of your interest. The distributed interest then becomes your passive income.

If possible, select that only the base amount, i.e. your original deposited amount, is always reinvested and the interest is distributed.

Alternative to the automatic investment function

In most cases, it is not possible to set the Auto Invest function so that you can achieve a real passive income. But there are alternatives for this as well.

Alternative 1: Investing on a rolling basis depending on the investment term 

P2P lending passive income - Alternative 1: Investing on a rolling basis depending on the investment term 

To achieve this, you divide the investment amount so that you always invest proportionally to the term. This sounds complicated, but it is not.

For example, if you invest in loans with a maturity of 12 months, you first divide the investment amount by 12, and then invest the divided amount for 12 months each month.

If we continue the example with an investment amount of €36,000 and a return of 10% p.a., this would practically mean the following:

  • 01.01.2021: €3,000 invested, on 01.01.2022 payout €3,300, €300 interest

  • 01.02.2021: €3,000 invested, on 01.01.2022 payout €3,300, €300 interest

  • 01.12.2021: €3,000 invested, on 01.12.2022 payout €3,300, €300 interest

Thus, month after month, only your pro rata capital is invested. After one year, i.e. at the end of the term, you can then skim off the interest and invest the pro-rata investment amount again for 12 months.

The disadvantage of this solution is that you have to wait at least until the end of the term until you receive the very first interest and thus the desired passive income, and that you have to wait at least 12 months until you are really fully invested.

However, if you apply the same approach for shorter terms, you can shorten the waiting time for the first interest distributions and thus your first passive income.

Alternative 2: Invest in short-term P2P loans

P2P lending passive income - Alternative 2: Invest in short-term P2P loans

An alternative is to focus on short-dated P2P loans. These are consumer loans with short terms of maximum 30 days (short-term loans). This would have the advantage for you that you do not have to wait 12 months until you receive your first interest payments and thus your passive income.

Almost all major P2P platforms offer short-term loans. But there are platforms that offer a particularly large number of short-term loans, including Mintos, Twino, Bondora, PeerBerry and viainvest.

With the loans offered, you can build a loan portfolio that consists of short-dated loans. The easiest way to do this is to set up an Auto Invest portfolio on each platform and deactivate it once the investment amount is fully invested. You then repeat the process per platform every month after you have deducted the interest. Once you have set up the Auto Invest features, it will take you a maximum of 5 to 10 minutes per month.

If we continue our example with an investment amount of €30,000 and a return of 10% p.a., you will quickly notice that a return of 10% p.a. would no longer be sufficient to achieve a monthly interest income of €300 because you would only receive €250 in interest ( ( €30,000 / 100 ) * 10 ) / 12 ). You would need €36,000 to get €300 monthly or a return of 12% p.a.

But this alternative also has another disadvantage. With an investment amount of €36,000 you have to spread your capital over at least 5 platforms to limit the platform risk. Better would be even 8 platforms. For each platform, this means €7,200 or €4,500. On the individual platforms, however, there can be bottlenecks in the mediated loans, and it is not certain that you can invest your investment amount within 1 to 2 days.

Conclusion & Summary

P2P lending is a good asset class to build a passive income.

In our examples, you could see that even smaller investment amounts are sufficient to generate a passive income.

With the two presented alternatives, you can build a real passive income from P2P lending with a small investment of time. Both alternatives are not mutually exclusive.

On the contrary, it would make a lot of sense to combine both alternatives. Thus, you would invest the amount of money that you have not yet invested in the first alternative, according to the pattern of the second alternative, until you have fully invested your capital after 12 months.