Should You Invest in Peer-to-Peer Lending in 2023?

Peer-to-Peer investing is an excellent alternative investment. It can be compared to some other traditional investments to see whether it makes sense to invest in peer to peer platforms.

Peer-to-Peer platforms solve two problems:

• Private lenders/investors need returns because savings rates are low
• Borrowers need money to support and grow businesses or to fund deals

Whether you should invest or not in P2P lending is a multi-faceted question. I think we should start by comparing P2P lending with other investment alternatives.

P2P Lending VS Crypto Lending

By crypto lending, we usually mean a form of P2P lending that features crypto assets as collateral. The interest rates are typically lower than those available for traditional P2P lending, however, the fact that the loans are overcollateralized can bring a much higher degree of safety. On the other hand, many people still distrust anything crypto-related. I personally think that crypto lending platforms like YouHodler and Nexo provide a better deal than most traditional P2P lending platforms, but it can easily be argued that the risk-profile is higher.

P2P Lending VS Crowdfunding

Peer-to-peer lending is actually also known as crowdlending, which gives you a clear indication that there are lots of similarities with crowdfunding. The latter is a way to raise money for a project, without having to resort to venture capital.

The difference is that with crowdfunding the end goal is to fund a product, and usually receive the product in return, as in platforms like Kickstarter, while with P2P lending the investors are buying parts of loans with the aim of receiving back principal plus interest (the profit).

With crowdfunding of products, we can’t really talk about return percentages, although we can have a look at crowdfunding of real estate, in which case you will have a percentage return.

P2P Lending VS Real Estate Deals

There are many ways of investing in real estate, and then again many types of real estate deals. If we compare P2P lending to real estate crowdfunding via online platforms, we can see that P2P lending has the clear edge when it comes to returns.

With real estate crowdfunding, you can expect 3-7% returns while with P2P lending you can expect 10-15% consistent returns.

Of course, this comes at an extra risk. Real estate investing has a lower risk profile simply because in the case of borrower problems or default you can resort to having a claim on the underlying property, and thus it is easier to recover debt, at least partially.

P2P Lending VS Bank Savings

Bank savings rates are still abysmally low. If you have large amounts of sitting in bank savings accounts for a long time, you will lose money to inflation as the cost of living and goods increase. If you need your funds in the short term, holding the money in a savings account can make sense, but if you don’t need the money, then you would be better off taking the necessary investment risks to grow your money using compounding interest.

P2P Lending VS Company Bonds

Bonds are usually unsecured and when you invest in a company bond or mini-bond, you are investing money directly into the company which is risky. If the company goes out of business (which does happen), bond investors are usually treated as unsecured creditors and are at risk of losing their capital. To top it off, bond rates aren’t even that attractive with most bond offerings paying between 3.5-7%.

If you are going to take risks, it makes more sense to invest through reputable FCA regulated peer to peer lending companies offering secured loans that pay equal or more interest than private bonds pay.

P2P Lending VS Stocks

Equities had a pretty poor year in 2018, and when we compare stocks versus P2P lending we can see that the latter’s returns were 26% higher. They’re also risky in their own right. I would still suggest investing in stocks for the long-term, however, if you want to start earning money right away then P2P lending is the way to go.

Bank savings accounts, stocks, and bonds are the most popular investment options for much of the population, so for the purposes of this post, I won’t delve into other options such as cryptocurrencies, gold, startups, etc.

With those alternatives covered, let’s talk about something that very few people seem to consider when it comes to investment, especially P2P lending…

Downsides of P2P Lending

There are several potential downsides that we should keep in mind when considering investing in P2P platforms.

Risk

Let’s make this clear. P2P lending is an investment class that carries moderate risk, and you should always be aware of that. In the event of the world economy going south, I expect P2P loan originators and platforms to suffer considerably, with a potential loss of some of the capital I have invested.

Having said that, there are several ways of managing risk. Besides the fairly obvious risk management technique of diversifying into other types of investment apart from P2P lending, you can also use several P2P lending platforms, several loan originators and always invest little money in each loan, so you end up with thousands of microloans instead of a few loans in which you are highly invested.

Also make sure you invest in the right platforms, you can take a look at my favorite European P2P lending platforms to find some highly rated ones.

Time Investment Required

Investing on P2P platforms like Mintos and Twino can be as simple as using the platform’s auto invest strategy, putting in an amount of money, activating the strategy and sitting back to wait until the interest starts rolling in. This takes just a few minutes.

On the other hand, if you’re going to be investing in several platforms and digging deeper into how the platforms and different types of loans work, you will spend a considerable amount of time on your P2P lending investments.

Frankly, when I see the net worth reports and monthly income reports of many FIRE bloggers, I wonder what’s the point behind all they’re doing. The only explanation for spending so much time for so little return is that they are making much more money off the affiliate commissions they get when promoting some P2P platforms. It doesn’t make sense to spend say 20 hours a month on something when you’re earning €100 in interest. That’s not even taking into consideration the risk of your capital invested due to platform or loan originator bankruptcy.

Again, that’s why I would recommend just investing your money on something like the Mintos Invest & Access system as it’s very low maintenance and very liquid.

There is, however, one possibility where it is justified to spend a lot of time on P2P lending platforms even if you don’t have a huge chunk of money to invest. This is when you’re doing it as a learning exercise in order to get into the investing world and learn how everything works. I’ll talk about this in more detail in the Advantages section further down.

Advantages of P2P Lending

High Returns

I don’t know of any other investment class that is so easily accessible to the average person and provides such high returns. Cryptocurrency is the other investment class that comes to mind, but it’s way riskier and much more difficult for the average person to enter due to a high technical barrier of entry, developing legislation, and high complexity.

If you want to really grow your net worth aggressively, P2P lending is a great option.

Learning about Investing

While I spend a lot of time on real estate crowdfunding and P2P investing, the main reason why I’m doing all this is that a few years ago I set a target for myself to really learn the ins and outs of investing in different asset classes.

P2P platforms and crowdfunding websites are the perfect places to learn about investing.

Since you’ve got your money at stake, you’re much more likely to take things seriously and really learn the stuff than if you were just reading a book about investing.

It’s important that you learn not only how things work, but also how you react to things. At the end of the day, investing is also about handling your emotions.

What do you do when you’re riding a huge way of optimism, such as the Bitcoin bull run of 2017?

And how do you feel when everything you invested in seems to be burning to ashes?

Knowing how you react will help you become a better investor, as you will learn that perhaps certain asset classes stress you out too much and are best avoided, or maybe that you are not very risk-tolerant and would prefer to invest in a globally diversified index fund than pick investments yourself.

Whatever the lesson, the guarantee is that you will learn a lot, and in my opinion that knowledge and experience are far more valuable than the monetary returns.

Conclusion

Every single investment method has its pros and cons, including property (high cost of entry, increased stamp duty taxes, landlord headaches), stocks, shares and funds (if the market crashes, your capital and emotions could spiral downwards), and bonds (returns are low).

Peer-to-Peer lending is not without its issues. Some companies are complicated to understand and have a higher investment learning curve. If you invest through the wrong companies, don’t diversify correctly, only choose high risk/reward loans chasing returns or select the wrong loans, your returns could be in the red. But if diversify correctly by spreading your money across several companies and loans, P2P lending can be a very positive investment vehicle.

You can read about my favorite platforms here, but if you want to cut to the chase I can tell you right away that my absolute favorite is Mintos, and that’s where I put most of my money. I’ve been able to achieve 11,42% returns per year which I’m very happy with.

You will also notice that there are now a ton of bloggers that write about their portfolios and favorite platforms. I advise you to select 2-3 platforms that look interesting and read as much as you can about them, don’t just trust me or any blogger when choosing platforms. It’s your money and you should make an informed decision on how you invest it.

You should also always consider the taxation consequences of every investment you make. I’ve even covered taxation of P2P platforms in a separate post so you can check that out for starters, although you’ll obviously need to check the specific tax rates in your country of residence.

If you had to ask me for just one platform that you should check out and dig deeper into, as I said, Mintos is currently the biggest, most liquid and most transparent P2P lending platform in Europe. Next up I would say Twino and Bondora are the ones I’m liking the most.

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