I bet you heard about crowdfunding, but what about crowdlending, what is crowdlending? Actually they are quite similar, with crowdfunding you help people and get a product in return, with crowdlending you also help people but you earn profit instead.
Crowdlending is also known as peer-to-peer lending or P2P. This kind of investment for private people took it’s first steps i 2005 with the launch of Zopa and later prosper. Since then it has been growing and growing, and now there are a lot of platforms all over the world, with Lending Club in the USA being the biggest. Crowdlending started accelerating around 2013, and never looked back since. It’s a very trending investment form.
How do crowdlending work?
Lets split op the word, so we have “crowd” and “lending”. Then it gets quite easy to understand. Basically it’s a crowd, as in a lot of people, lending money to one person or a company. Just as bank’s or loan originator’s would do.
The way it work’s is that you have an online service, a crowdlending platform, that connect the lenders with the borrowers. Loan originator companies, sell a part of a loan, op to 90%, to one of these crowdlending platform’s. The reason why the loan originator can’t sell the hole loan, is the the platform’s want to make sure that the originator of the loan have interest in getting the money back from the lender, even when they can’t pay, this is called skin in the game. Then the users of the platform (the investor’s, me and you), can invest as low as 1€ in to a loan. This make it possible for private people to invest small amount’s also, and still with a chance to have a decent kind of diversity in there investment’s. Because you can split small about’s like 1000€ into 100 loans.
The loans are quite similar to normal bank loans, there are a payback period, 12 month’s, 2 month’s or what ever it is. And there is also an interest rate, mostly above 10%, and some loan originator’s include late payment fees.
Lets make an example. John want to lend 10.000 € over 12 month’s with an interest rate of 10%. John walk’s to the loan originator. The loan originator then “sell” 90% on the loan to a crowdlending platform like Mintos. Mintos launched the loan on their platform, and the 9000€ loan is split between up to 900 investor’s. Then every month when John is paying back money + the interest rate, to the loan originator, you as an investor also get payed. So if you invested 10€ you would get 0,83€ back + interest rate every month.
wHAT ABOUT THE RISK OF INVESTING?
When we are talking risk, I normally say, that it’s all about finding an investment where the risk and return on investment are equal or the risk is lower. This means that if the return annual is 5% and you think that the investment risk is really high, then it’s probably not a good investment.
From my point of view, the risk is lower then the annual return when we talk crowdfunding, since the average annual return is from 9-14%. So I think it’s a good investment. All though, I only think it is, if you as an investor, take your reservations and use some of the features that the platform’s have. Especially you need to make sure you are taking advantage off the option to have a high diversity, between all those platform’s and loan originator’s.
A lot of the platform’s have an auto invest function. I think that this is the best way to make a less risky investment, buy using the categories to only invest in loans from the best loan originators, loans with current status, aso, at least it makes it easier. All most all the platform’s offers buyback guarantee too, buyback guarantee means that if the lender can’t pay then the loan originator has the responsibility to pay you back, sometimes with a payback penalty. You should NEVER invest in a loan without this.
You should look in to the following things:
– Rating of the loan originator.
– Loan Status.
– Amortization Method.
– Buyback guarantee.
– Economy of the specific crowdfunding platform.
– Option to sell loans or not (secondary market).
If you take all the things, listed above in to consideration, then from my point of view, crowdfunding is a really nice way to invest your savings. You should definitely visit explorep2p.com, they are making some nice ratings on loan originators from the different platforms, that will help you out.
If you think about investing you should take a look at my Mintos Review “here”.