Editor’s note: This content is brought to you for informational purposes only. It is not to be taken as financial advice. Consult a licensed financial advisor before you invest.
With the profitability of deposits at rock bottom, many investors are looking to make their savings profitable in alternative assets. With peer-to-peer “P2P” loans, we can obtain financing or invest in different projects to make the most of our savings without going to a bank.
Crowdlending platforms are a new way of raising finance and investing our capital to achieve profitability. These platforms connect people looking for loans with people looking for new forms of investment to get a return on their savings.
How To Invest in Peer-to-Peer Lending
P2P lending in Europe is bringing about a real revolution in the way people invest, and interest in this form of investment is clearly growing.
To invest in P2P loans, we simply have to open an account on one of the best P2P lending platforms that allow us to invest by creating a user and associating a bank account with the platform in order to transfer our capital from the bank to the projects we wish to finance.
When a borrower seeks financing, he/she makes a request to the P2P lending platform with all of his personal and economic data. The platform will perform a credit analysis prior to the acceptance of the application and assign a risk level according to the borrower’s profile. The higher the risk profile, the more interest will be paid as investors will take more risk and expect a higher return. This risk profile usually ranges from low risk to very high risk.
As investors, we will have access to all the current projects where we can invest, and we will have the option to choose which projects we wish to finance according to the level of risk assigned to each borrower, the repayment term, the purpose it will serve, and the return it will bring us.
We can normally invest in each project with a minimum investment of 50 euros, depending on the entity and its investment policies, although these are usually relatively small amounts. This allows us to invest a small amount of capital in several projects and diversify our portfolio in order to minimise risk.
Depending on the risk we are willing to take and our profitability objective, we can choose the projects to invest in according to the level of risk assigned. Thus, if we do not mind taking more risk in exchange for higher profitability, we can have a portfolio with a large percentage of our investment in credits with high-risk levels. But if we prefer to insure our capital to the maximum, although we must remember that as the capital is not guaranteed by any Guarantee Fund, there will always be a risk, we can make small investments in a large number of projects with a low level of risk.
Are P2P lending investments safe?
Like all investments, investing in P2P lending involves risks. However, the platforms carry out credit analyses prior to approving borrowers’ applications to ensure that they are sufficiently creditworthy to repay the loan without any problems.
There are ways of securing our invested capital a little more, for example, diversifying our portfolio as much as possible, being able to invest from €50 per project so that the risk involved in each investment according to the applicant’s profile in all loans will be lower, or investing only in projects with a low level of risk.
If we want to insure our invested capital to the maximum, only invest in products with lower risk—it’s never zero.
What returns can I get with P2P lending?
When we decide to invest, our objective is to obtain the maximum profitability with the lowest possible risk. Depending on our profile as investors, it will be more convenient for us to obtain more or less profitability at the cost of obtaining more security in our investment. The profitability that we can obtain from the invested capital will depend on several factors:
The P2P platform: each entity will assign higher or lower interest rates depending on the level of risk. Some institutions may grant loans at 0.5% for risk level A and others at 3% for the same level of risk.
The commission charged by the platform: P2P lending platforms will charge investors a commission to finance themselves. This commission is usually between 1% and 2% per year, although it is usually charged on a monthly basis, and many of these companies will only do so if the project is profitable.
The projects we invest in: depending on the number of projects and the level of risk we choose, we will be able to achieve a different return. Thus, if we invest a large percentage of our capital in projects with a high level of risk, we will achieve a high return, but we will also run a higher risk of default.
To assess where to invest, we must first evaluate what kind of investor we are, what our return objectives are, how long we plan to have the capital invested or how much risk we are willing to assume. By clarifying these questions, we will be able to invest in the projects that best suit our profile.
Advantages of Investing in Crowdlending
Investing in P2P lending loans in Europe is a new, alternative way of obtaining a return on our savings.
Provided that they are used responsibly, investing in these platforms can bring us great advantages:
- It provides savers and investors with direct, low-cost access to an asset class with a good risk-return ratio, hitherto only accessible to the banking sector.
- Loans are usually short-term, between one month and five years, and repayments are usually made on a monthly basis and include both principal repayments and interest payments, allowing investors to obtain cash on a regular basis and to know in advance the schedule for receiving it.
- The decorrelation between the projects where the investor has his money invested is probably the most important element when choosing an investment product as the default of one borrower will in no way affect the payment of the others, or market fluctuations will have an indirect impact on the repayment capacity of the borrowers.
- Investment in the real economy: we are investing capital in real companies so that they can obtain financing and grow their business and thus help our country’s economy by helping small businesses to obtain the cash they need.
- Before deciding whether we are interested in investing in this type of platform, we should check the risks involved as well as the advantages it can bring us. In order to invest responsibly, we must ensure that we understand the product we are investing in as well as its risks and limitations and the market in order to avoid bad surprises.
This content is made possible by M. Rafiq.
Photo credit: Shutterstock