Get started with p2p lending

26th October 2019

What are we talking about?

So you want to create a second source of income with your savings? What about getting started with p2p lending?

There are plenty of platforms out there, but for newcomers here we will list only the market leaders.

First of all, you have to understand the difference between peer to peer lending (p2p) and crowdfunding. P2P is investing in small loans provided to individuals or businesses, usually from developing/semi-developed countries.

It includes platforms like Mintos that allow for quick distribution of your capital to hundreds of small loans. All made through an automated algorithm-bot that you set up with a daily interest in the region of 9 – 13%.

On the other hand, crowdfunding is mostly focused on providing loans for real-estate/business development (i.e. Housers) and normally requires a fair amount of manual selection of your investments from your side.

You can expect higher annual rates from 7 – 20%, depending on the platform. Your capital is usually invested for a minimum of 12 months.

Understanding the risks

P2P is not risk-free. In order to have a profitable investment, we need to make sure that we adequately mitigate our risks. But first, we need to understand them. There are 3 main risks that we need to be aware of before investing in peer to peer lending.

1. Counterparty risk – In the case of peer to peer lending, the risk that a platform or a loan originator (the entity that provides the loans on the platform) may go bust, thus resulting in our capital getting lost.

In the case of crowdfunding, a project may fail, thus resulting in a lengthy process that could take years to settle to get a portion of our money back. (if the loan is secured, backed by any asset)

2. Currency exposure risk – A lot of platforms offer loans in local currencies (i.e. Mintos) and a portion of our capital is converted into that currency in order to invest. Even though this increases our diversification, it also exposes us to currency fluctuations. This could lead to lower returns with volatile currencies, such as the Ruble.

3. Geographic risk – Most of the P2P and crowdfunding platforms are based in the Baltics, and any problems associated with that region can have a direct impact on a non-diversified portfolio. (e.g. a slowdown in the real estate market of Tallinn, Estonia)

How to mitigate those risks

Peer to peer lending is a relatively new industry, and we haven’t yet seen how it will cope with the next financial crisis. For that reason, it is important you put a portion of your portfolio (money) in P2P and not all of it.

I personally allocate less than 40%, which I plan to reduce in the upcoming year. (add other asset classes, such as bonds and precious metals)

The second thing you have to do is learn how to diversify. For P2P you would have to split your money over 2-3 platforms at a minimum and for crowdfunding at least 4-5, so as to be able to invest small amounts in a lot of assets.

And while doing so, there are some rules that you need to keep in your mind, each to its specific field.

Get started with p2p lending  - An example of improper diversification on crowdestate
An example of improper diversification on crowdfunding. The letters in yellow are for a loan that is late and represents almost 1/4 of our total capital on that platform.

Regarding P2P lending

Always invest ONLY in loans with a Buyback guarantee, which means that the loan originator will pay you back personally if the loan defaults.

You have to make sure that the loan originator pays you back your owed interest if the loan defaults and he pays you back. (A list with all the loan originators on Mintos that pay up interest on defaulted loans can be found here and here)

Regarding crowdfunding

Do NOT rely on any kind of positive rating provided by the platform for a specific project. You still have to diversify so as to make sure that even if you lost a specific investment, ideally, you wouldn’t lose more than your monthly income.

Do NOT rush. It takes time to diversify with crowdfunding, usually 1-2 months until all your money is properly allocated. Invest small amounts in a lot of projects.

Do NOT rely on any kind of buyback guarantee given by any platform. There are no recorded incidents to my knowledge where a “provision fund” was able to re-purchase the failed investment. Try to invest only in “secured loans”, i.e. backed up by collateral that at least can provide some value in a bankruptcy.

Cashflow. Yes, that means having a monthly income that you can re-invest. Now that is something that is not generally offered by a lot of crowdfunding providers, but you should at least have 50% of your portfolio in loans that provide that necessary stream of income. (so you can monitor your progress as well)

For both P2P and Crowdfunding, make sure that there is a secondary market on the platform to sell your loans. This is extremely important in case you need to reduce the size of your investment.

Ready? Let’s get started

The easiest and the only platform you should certainly have in your portfolio when starting with p2p lending is Mintos. The first thing is to fund our account. Just go to the deposit section and make a small bank transfer, just to try out the platform.

As for how we set up our auto-invest, have a look at that video. Regarding which loan originators to choose for your auto-invest, make sure that you check here and here.

I would not recommend investing with “Invest & Access”, since its providing lower interest rates to loan originators that you haven’t selected. (so you don’t learn to do any due diligence)

As soon as your bot starts running, you will get a daily report from Mintos on your invested capital and your returns so far. Now, of course, Mintos is not the only platform you should have in your portfolio but its a great start to experience the p2p lending space.

Get started with p2p lending

Give it a few weeks, start reading about P2P and if you are still interested, come back here and get new suggestions on your next investments.

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