When you first hear about p2p lending & investing – like myself – you think all the claims of making double digit returns seem just too good to be true. It just sounds crazy that you can make between 10-20% on your investments (loaned amount) on platforms with exotic sounding names like Bondora, Mintos, Crosslend, Omahara, FellowFinance, Zopa, Funding Circle, RateSetter, Prosper, Lending Club, Dianrong……and many many more.
Your mind really goes in overdrive and fills itself with questions the likes of:
- Can I really make such high interest percentages? And if these 10-20% interest earnings are true how is this even possible?
(yes it is both possible and easy if you pick the right platforms)
- Which platforms are the best and most trustworthy to use?
(a whole bunch of them have been around for 10 years while making double digit interest percentages for their clients all-along)
- How long do I have to put my money away for? And if I ever need it on a whim can I get to it?
(yes, certain platforms led you sell your loan portfolio with one-click guaranteeing a high liquidity)
- What are the risks involved?
(borrowers who default on their loans, platforms that go bust,…etc…There are definitely risks, but so is investing in the stock exchange. If you do it right though p2p lending has less risk and a more steady return than any other form of investing or saving money)
- Is there a chance I will loose my money? (yes, but with buyback guarantees you can limit it greatly)
- Do I need to actively manage my money or is there also a lazy secure way? (yes, loads of platforms offer auto-invest options)
These are just a few of the questions that hit me when I first heard about the exciting world of p2p lending. It was all highly confusing and a lot of information to take in…
So I started researching the world of p2p marketplace lending a bit. I dove into articles and blog posts and slowly learned that it is a very new but quickly developing side of FinTech (Financial Technology) with an amazing potential. The more I read, the more excited I got about it.
Couple this with the fact that my savings account interest percentages where quickly heading towards a 0% interest rate and I grew even more determined to give p2p lending a try.
What exactly is p2p lending?
Let’s first start with a little explanation of what p2p lending exactly is.
Peer-to-peer lending, often abbreviated P2P lending, is the practice of lending money to individuals or businesses through online services/platforms that match lenders directly with borrowers. Since the peer-to-peer lending platforms offering these services operate entirely online, they can run with lower overhead costs and provide the service more cheaply than traditional financial institutions. As a result, lenders earn higher returns compared to savings and investment products offered by banks, while borrowers can borrow money at lower interest rates, even after the P2P lending platform has taken a fee for providing the match-making platform and credit checking the borrower.
As you can see p2p lending is a field that emerged due to internet technology enabling the direct matching of borrowers and lenders. The beauty of modern technology allows you to become your own little bank lending out a couple of hundred or thousand of Euros or Dollars and receive a nice interest percentage on it.
P2P Lending & investing history around the world
The first company to offer peer-to-peer loans in the world was Zopa, a UK based platform that is still going strong these days. Since its founding in February 2005, it has issued over £1.5 billion in loans. In 2010 Funding Circle became the first significant peer-to-business lender launching in August 2010 and offering small businesses loans from investors via the platform. Funding Circle has lent over £1.3 billion as of March 2016.Ever since 2005 many new platforms have arisen all over the world providing alternative ways of financing for individuals and businesses.
The biggest p2p lending market in the world by far is China where it is a 60 billion dollar industry with over 4000 different p2p lending platforms serving the hundreds of million of people that are not served well by the traditional banking system. It really is a booming (and sometimes shady if you don’t do your due dilligence) over there.
The modern peer-to-peer lending industry in US started in February 2006 with the launch of Prosper, followed by Lending Club and other lending platforms soon thereafter. Both Prosper and Lending Club are located in San Francisco, California and they are currently still the largest platforms in the USA market.
Early peer-to-peer platforms had few restrictions on borrower eligibility, which resulted in adverse selection problems and high borrower default rates which resulted in many investors loosing money in the early years.
In 2008, the Securities and Exchange Commission (SEC) required that peer-to-peer lending platforms register their offerings as securities, pursuant to the Securities Act of 1933. The registration process was an arduous one and Prosper and Lending Club had to temporarily suspend offering new loans.
The regulation proved to be very useful cause after relaunching and reinventing their p2p lending process both of the platforms have managed to make steady returns for their investors post 2010.
p2p lending in Europe has its own unique features that make it a very promising market. The fact that the EU zone comprises many different countries, each with their own financial basics and interest rates, makes that one can profit hugely by market inefficiencies across the entire continent.
Bondora was the first one to recognize this huge potential by becoming the first pan-european lending platform. Basically any European can invest in their loan offerings in different countries. After them many other platforms followed their model.
How I got into p2p marketplace lending
As you can see the p2p lending &investing market is diverse, confusing and abundant. That’s what I thought the first time I started diving into the concept.
Initially I was very skeptical and quite reluctant to give it a try. That all changed when I read an article by Marc van der Chijs, a well-know serial entrepreneur, venture capitalist and (angel) investor. On his blog marc.cn (which I had been following for a while) he wrote about his personal – and highly positive – experiences of years investing in Chinese and American p2p loans on Prosper, LendingClub and Dianrong. The article was named “why p2p marketplace lending is so succesful” and it was a real eye opener by someone I regard highly.
It really was a key moment that made me realize it was about time to try out this promising new investment vehicle myself…
A p2p investment experiment by average Joe
To find out how p2p lending and investing really works in practice I decided to turn my personal p2p investment trials into a big experiment. After some initial research I invested some money in a couple of platforms to see first hand how they differ in their approaches and returns. And on this website I will describe my personal experiences with these platforms: the do’s, the don’ts and all the things I learned along the way.
I am by no means a financial expert. Just your average Joe who started looking for alternative ways to use his modest savings (several thousand euros) as the bank’s interest rates started dwindling a couple years back.
I will describe my p2p lending experiences as a very average user that is interested in making his money work for him in a relatively passive way. I don’t like having to actively watch my accounts often and prefer using auto-investment options. This stems from my lack of deep financial analysis experience (I am a finance average Joe after all) and my lack of willingness to devote too much time to money management.
Over time I have learned a lot and I especially learned that it is very possible to passively invest my saving in different p2p lending platforms while making solid returns of between 10% and 20%.
This website documents my story of how I got there…