How To Start With Peer-to-Peer Lending

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In my previous blog post I elaborated on why one would start investing, in this blog post I explain what peer-to-peer lending is and how to start investing.

What is Peer-To-Peer Lending?
Peer-to-peer (P2P) lending is lending ones own money (as a lender) to individuals or businesses (the borrowers) in exchange for an agreed interest rate. The lending takes place through online platforms that match lenders and borrowers. By assessing the borrowers  profile and their cause for requesting a loan, lenders can decide to take part and invest a bit of their money.

Some platforms require the lenders to deposit money on their accounts before it can be used to invest, other platforms require lenders to sent their money once projects are fully financed. The minimum amount to invest differs per platform from € 1, to € 10, to € 100 per loan. You can invest manually, but some platforms also have the option to auto-invest. This is very convenient, since the platform will invest automatically for you once you configured the parameters as you like, but care must be taken to do this correctly. This way you can diversify your portfolio very easily and it doesn’t cost you a lot of time. Another advantage is that you can select the option to reinvest incoming payments to make your money work continuously and earn compound interest (more on this in another blog post).

How to start
As a first step, it is important to understand that there are risks involved in investing. That’s why you always have to make sure you only invest an amount of your income that you can afford to loose and that you always have some savings in case of unexpected events. When you have decided how much you want to invest, you can start with transferring money to the platform of your choice. When the money is in your account, you can start investing.

A platform I think that is a good option to begin with is Mintos, because they offer a lot of information about loan originators and loans. You can see exactly what is going on with your investments and how it is divided between countries, loan originators and more. They also offer auto-invest. This means you only have to choose how you would like to let the platform invest your money and the platform starts to invest for you. They also have some really easy options for transferring money into your account, like Trustly and iDEAL (for euros only). The money only took a few hours to show up in my account.

Auto Invest
I will show you how I have set my auto-invest parameters on Mintos:

Click the images to enlarge.

On Mintos, go to Auto Invest -> “Create new Auto Invest strategy” -> “Custom strategy”.

Left image:
Make sure to choose “select all” (it selects 54 out of 55 loan originators, because 1 loan originator doesn’t offer buyback guarantee, which I had already set to “yes”), this will diversify your portfolio as much as possible. Also make sure to choose loans with buyback guarantee*, this lowers your risk. Another thing to look at is the amount of loans that match your criteria. If you change your parameters, the number changes. If it’s a low number, you won’t probably get all your money invested.

If you have the time to check out every loan originator, you can select the ones that have the lowest risk / the best track record, and diversify less. As most starting investors have day jobs next to their investments and they cannot afford to spend every minute looking for the best options to invest in, diversification is a good thing I think. More on this: To Diversify or Not to Diversify

* From Mintos website: “A buyback guarantee is a guarantee issued by the loan originator to the investor for a particular loan, that confirms the loan originator will repurchase the loan from the investor if that particular loan is delayed by more than 60 days. The buyback guarantee is given at an individual loan level and is marked with the symbol of a shield. If a loan with a buyback guarantee is delayed by more than 60 days, the loan is automatically bought back by the loan originator from the investor at the nominal value of outstanding principal, plus accrued interest income.”

Right image:
I chose 12% interest and up, because it spreads out more between loan originators and terms with these settings. I choose loans with a term between 0 – 36 months. The grey bars show the amount of loans in that area.

You can name your strategy settings (for reference) by choosing a strategy name.

Portfolio size is the amount you want the platform to invest for you and spread out in loan originators. It is important for diversification to choose a number close to the amount that you actually have on your account.  For example: If there are 10 loan originators selected and you have set your portfolio size to € 1000, there is room for € 100 per loan originator. If you only have € 200 in your account, it is possible that your investments are only spread out between 2 loan originators. Not ideal for diversification. I learned this from experience. After some adjustments and a little bit more money in my account, my diversification looks a lot better already.

The investment in one loan is the amount you want to invest in each loan. The lowest you can invest per loan is € 10, I have set it at € 10 – € 25. There are plenty of loans available and with a small amount across loans, it means more diversification. With these settings, the auto invest feature has the option to invest any amount between € 10 and € 25. If you have a large amount of money to invest, you can choose to set it higher off course.

The questions on the right are all set to yes. You can read more information about the  questions at the “i” next to the questions. To me, these are the best parameters for my Mintos account.

How are my investments doing?

These are my investments at Mintos at the moment and the spread in loan originators, interest rate and term. The big one is from my first auto-invest settings which weren’t that good, it was mostly spread between 2 loan originators. It looks a lot better already with the settings in this blog post. I will let you know in a while how my investments are doing with these parameters.

P.s: If you start investing through my referral link, you will get 1% cashback off your first 90 days of investments. 

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