It took me a bit to start writing about investing, at least publicly, because it has such a stigma with it, I’m not a financial advisor nor claim that what I’m saying works for me will work for you, but I do want to share these experiences hoping the best.
There are multiple vehicles to start investing, I have chosen more traditional means, but I got interested in peer-to-peer lending or better known as the P2P investing area, this is basically all about lending your money to people that want to take out loans from companies that aren’t traditional banks.
Before I start talking more about the topic, I want to clear something out, I started believing that lending was a shady business of corporations and pawnbrokers, but this isn’t the case, there are multiple types of companies and types of loans that you can opt into, more than you’ll be able to see in a lifetime.
So how does P2P investing works you may ask, it’s simpler than what I believed it to be, in simple terms, you invest your money into a platform, companies in these platforms that lend money to people, business, or other entities come in, take that money, put it into this persons account, and you win an interest rate based on your contribution.
Now, on not so simple terms, the platform where you put your money in is just a marketplace for lending companies that want to diversify and invest into more people asking for money, to search for investors willing to accept different levels of risk and take that money towards these contracts. In general, these companies tend to put 50% or more of the money in the contract from their reserves but some companies seem to ask more than the amount of the lend to then take out some of their initial cost and offset that to lend out more.
These companies are doing all the job for you, and because they are being helped by people like you and me that want to invest in this area, they can now research more borrowers, see their risk levels and make assessments that are shown in the marketplace.
All this has a familiar tone, if you are from the US or Europe you may remember the 2008 market crash which was sponsored by banks lending more money to people that couldn’t pay those debts, and yes, this is a similar situation with the learnings from that crash. These marketplaces require transparent accounting to offer confidence to investors, they require these companies to meet certain criteria to be able to participate in the market, offsetting most of the risk we saw in 2008.
Now, there are multiple platforms, especially here in Europe, but I’m just going to base everything I’m saying from my experience with the following platforms
These are the same UX wise, the difference is what type of companies are inside the marketplace and which loans they offer, in my opinion, the only thing that you have to keep in mind is that using multiple platforms to invest in this market is great because it allows you to diversify your portfolio.
The onboard process is quite simple, they ask all the regular investing platform legal documentation required by the EU, they require a minimum amount of €10 to start investing and all of them have an option to configure an auto investing, so any profits you receive can be automatically invested again into the marketplace without you having to worry about it.
There’s one important catch though, always check the option to only participate on loans that have a 100% buyback guarantee, meaning, if the borrower fails to make payments, and the loan defaults, the company that vetted this person must pay back your money plus the accumulated interest to that point to you, if this happens, they usually have 15, 30 or 60 days to do so depending on the contract.
And that’s it after you start putting money into the platforms, it’s just a matter of waiting and checking it out every week or so if you want to see how much have you earned back, but let’s say that you just encountered an emergency and you want to take all the money out to pay out X. Well, from the platforms I have invested into it, you can take out 90% of your money in less than 24h and 100% in less than 5 days, which isn’t bad at all if you have invested in Real Estate and think about how much time you need to sell that type of asset.
I have had positive experiences so far, but I also have less than 2 months in the game, my idea with this blog post is to both inform you about the market opportunities available to you and to also make a commitment to myself to start talking broadly about my experiences.
I hope it helps you understand how peer-to-peer investing works and if you have any doubts feel free to reach me on Twitter.
I’m not a registered financial advisor. This article is a review of my experiences so far and none of it can be considered as financial advice nor should be relied upon to make investments.