The Ultimate Guide To Peer-to-Peer (P2P) Lending

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In this ultimate guide, I will teach you the basics of peer-to-peer lending, how to start and what risks are involved in this form of investing. The platforms mentioned in this guide are all from Europe, but the basics apply to platforms in other parts of the world as well.

Now grab yourself a nice cup of coffee, or tea, or whatever you like, because it will take you some time to digest this post, for this is the ultimate guide!

This post may contain affiliate links. Please visit my full disclosure policy for more details.

What is peer-to-peer lending?

Peer-to-peer (P2P) lending is lending your own money (as a lender) to other 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 motivation for requesting a loan, lenders can decide to take part and invest their money, usually together with other investors.

History

The P2P lending industry started in 2005 with Zopa, the first personal finance lending company ever, which is based in the UK. Later the US followed with Lending Club and Proper. Since then, the industry has grown very fast. Nowadays, there are thousands of platforms across the world.

In 2010 Funding Circle launched. They are the first P2P lending platform focusing on business loans. Since 2010 they already helped 62,000 small businesses across the world.

Future

According to Transparency Market Research: The P2P lending market was worth $26 billion in 2015 and will grow to $897 billion in 2024. This means that this market will like grow a lot, so this is the time to take advantage of that growth!

Terms used in peer-to-peer lending

  • P2P: Peer-to-Peer.
  • LTV: Loan-To-Value is the ratio between the amount of the loan and the market value of the collateral.
  • APR: The Annual Percentage Rate is the annual rate charged by the loan originator to the borrower.
  • Loan originator: A loan originator lends money to borrowers. To be able to lend out more money, they place the loan on a platform like Mintos or Grupeer and let investors buy a part of the outstanding loan.
  • Skin in the game: This refers to peer-to-peer companies or loan originators investing some of their own funds in each loan.
  • NAR: Net Annualized Return is an annualized measure of the rate of return on actual investments made in loans, after actual write-offs and service charges.
  • Amortization: Most platforms use 2 different options: full amortization (you will get interest and principal back each month, the interest is less every month as the outstanding principal lowers every month as well) or interest-only (you will receive interest every month and the principal is paid back in full at the end of the term. The interest stays the same, since it’s based on the same principal).
  • Buyback guarantee: Mintos explains it like this: “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” The exact terms of the guarantee differs per platform.
  • Cash drag: When you’ve got money on a platform that isn’t invested yet, this money is not working for you and you don’t earn interest from it. Cash drag happens a lot if a platform doesn’t have new projects available all the time. Or if your auto invest settings are set in a way that no loan fits in.

The risks of peer-to-peer lending

Investing always comes with a risk. P2P is no different and you should always be aware of the risks and deal with them. I’ll elaborate on possible risks below.

Risk #1: The borrower doesn’t pay

The most obvious risk is that a borrower doesn’t pay back his/her loan. This happens occasionally and it could mean that you lose the money you invested in that loan.

Some platforms offer some form of buyback guarantee, which means that the loan originator or the platform will buy the loan from you and you will get your principal plus accrued interest back. In exchange for this the platform usually receives part of the interest. It is like an insurance: you get some degree of protection in exchange for a premium.

Platforms that don’t offer buyback, usually will try to get your money back, but chances are you won’t receive everything back. You’ll find that the interest rates offered are significantly higher, allowing you to cover/manage the losses yourself.

As Robert T. Kiyosaki says in his book Rich Dad, Poor Dad: “There is always risk. Your job is to learn to manage risk rather than avoid it.”

Risk #2: The value of the collateral went down

If you invest in loans that are secured by collateral, like real estate, the loan-to-value is important. Loan-to-value is the ratio between the amount of the loan and the market value of the collateral. If the loan is 70% or less of the value of the collateral, your money is supposed to be secure.

But in reality, the collateral may have been valued too high or the value went down drastically. In that case, the collateral isn’t sufficient enough to pay all the investors back and you might lose (part of) your money. It may also be hard to liquidate collateral, reducing the value even further.

Risk #3: The loan originator or platform goes out of business

Loan originators and platforms can close down or go bankrupt for different reasons. In that case, when the borrower defaults, the buyback guarantee isn’t worth anything, as the loan originator or platform can’t buy back the loan anymore.

In 2017, a loan originator from Mintos, Eurocent, went bankrupt. The court process is still going on, so all the investors haven’t received their money yet and likely won’t get everything back either.

In 2018, a British platform, Collateral UK, was closed down by the Financial Conduct Authority, because they traded without a proper license. The investors remain uncertain if they will ever receive their money back.

Manage risk

To manage your risk, it is important to do a thorough check on every platform you want use for investing. Also check the individuals or businesses that request loans and their loan originators. Is there a form of buyback guarantee and how does it exactly work?

You can always contact a platform to ask about the risks and what they do to minimize the risks. Another important part is to diversify between platforms and loans. If you put all your money in a single platform and it goes bankrupt, you may lose everything.

How to start investing in P2P lending?

 

Step 1: Do you have money to invest?

As a first step, it is important to understand that there are risks involved in all forms of investing, including P2P Lending. That’s why you always have to make sure you only invest an amount of your income or savings that you can afford to loose and that you always have some savings left in case of unexpected events happen.

When you have decided how much you want to invest, you can start with choosing your first platform.

Related:
From broke to financial independence in 7 steps

Step 2: Find a platform you like

There are lots of P2P lending platforms in Europe. The platforms that offer buyback guarantee are less risky and are a good starting point for newcomers.

Most platforms require the lender to deposit money on their accounts before it can be used to invest. Other platforms ask lenders to transfer their money once projects are fully financed. The minimum amount to invest differs per platform.

On a lot of platforms, you can invest from as little as € 1 – € 10 per loan/project. You can invest manually, but some platforms also have the option to auto-invest. Some platforms also offer a secondary market. I will explain the auto invest feature and the secondary market later.

A few platforms I’ve got experience with and I really like are:

Mintos

  • Personal loans
  • Most loans come with buyback guarantee
  • Interest rates of 6% ~ 14%
  • Auto-invest
  • Secondary market
  • Cashback bonus: 1% bonus on your invested funds in the first 3 months trough my affiliate link

Grupeer

  • Personal loans
  • Buyback guarantee
  • Interest rates of 10% ~ 14%
  • Auto-invest
  • No secondary market yet

Fast Invest

  • Personal loans
  • Moneyback guarantee
  • Buyback guarantee
  • Interest rates of 9% ~ 16%
  • Auto-invest

Envestio

  • Business loans
  • Buyback guarantee with a 5% penalty
  • Interest rates of 15% ~ 20%
  • No auto-invest yet
  • No secondary market yet
  • Cashback bonus: € 5 + 0,5% bonus on your invested funds in the first 270 days trough my affiliate link

Crowdestor

  • Business loans
  • Buyback guarantee Fund
  • Interest rates of 12% ~ 20%
  • No auto-invest yet
  • No secondary market yet

You should make your own choice based on the website of the platform, different reviews of users and of course your own gut feeling. If it doesn’t feel right, don’t do it!

Related:
Mintos review
Envestio review

Step 3: Create an account

If you find a platform you would like to use for investing, it’s time to sign up. Signing up usually takes only a few minutes. Sometimes you have to upload documents for identification before you can start investing.

Other platforms only need your documents when you want to withdraw funds. I suggest to always send your documents before you start investing, so you know beforehand that it’s approved and you can withdraw your money when you want to.

Step 4: Deposit money

Once you are signed up and your account is activated and approved, you can deposit money. Most platforms offer multiple options to transfer money to them. For example Mintos has 3 options:

  • Direct Transfer: Trustly or iDEAL
  • Bank Transfer: Manually transfer your money from your bank to theirs
  • E-money service providers: Transferwise

Some platforms only offer a Bank Transfer. My experience is that the money is always available on the same day or the next day in your account. This might differ depending on your country of residence or your bank. If your money doesn’t show up, don’t hesitate to contact customer support.

Step 5: Start investing

Your money is in your account, which means you can start investing. Every platform works differently of course, so you have to check out the website thoroughly to understand how to invest in the platform of your choice.

I will show you how to start with Mintos:

To invest manually: (see image below)

  • Log in to your account
  • Go to Loan listings
  • Choose the currency and loan type you would like to invest in
  • Choose the interest rate of the loans
  • Choose the term of the loans


Click the image to enlarge.

There are more options to choose on the loan listings page. Like the Mintos rating of a loan, the loan originator and if there is a buyback guarantee. Just look trough the page to discover all the available options and decide which parameters you like to set.

When you selected your parameters, you can choose a loan from the list (see image below). If you press the number below “ID”, you will see the details of the loan. If you scroll down on that page, you will see the borrower and collateral details, the payment schedule and the investment breakdown.

Click the image to enlarge.

By filling in an amount and press “invest”, you will invest in that particular loan. Congratulations, you just invested! Now you’re off to make your own passive income, exciting don’t you think? I do!

You can also use the Auto Invest option. I suggest to first check some loans manually to get feeling with the platform. To get help setting up your Auto Invest settings on Mintos, I refer you to my Mintos review as I explained it there, with screenshots.

The review also tells you specifically what to look for when choosing the loan originators you want to invest in, so I suggest to check my review out.

Step 6: Diversification

Diversification is very important while investing, especially with P2P lending. I recommend to use multiple platforms, I suggest to use at least 5 different platforms. Also diversify between loan originators, countries and different kind of loans, like personal loans, business loans and real estate.

You could make a chart with all of your loans or the loan types, to check your own diversification and if you need to make some changes. At the moment, I only have a chart with the different platforms.

That already shows that I have too much money in one platform. As that is the platform I started with and didn’t know much about P2P lending or the importance of diversification yet (heck, I didn’t even know about all those other platforms!), my diversification will get better over time as I’m not investing in new loans there.

Step 7: Earn interest

Once you invested in your first loan(s), you will start to receive interest. Most loans pay interest every month. Sometimes a loan is repaid early and you will receive the interest (and the principal of course) earlier than expected.

Step 8: Reinvest

To let your money work continuously for you, you should always reinvest your principal and interest. This way, you will earn interest over your already earned interest, which is called compound interest.

I will publish a blog explaining compound interest with examples soon and will link to it here when it’s online.

As Albert Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

Step 9: Repeat step 5 – 8 to grow your passive income

Invest more, diversify more, earn more interest and reinvest it all. This way you will see your passive income grow every month. Even if you can only invest € 50 or € 100 every month, it will keep going up.

My own passive income just crossed the € 100 / month mark. This means I could buy a whole week of groceries, or I could pay my health insurance every month. Since I don’t need that money now and I want my passive income to grow, I leave all the principal and interest on the platforms and keep it invested.

Auto invest

Instead of manually selecting each loan to invest in, a lot of platforms offer auto invest. This means that you can choose in which loans you want to invest in. You can choose things like interest rates, terms, loan originators and currency.

It differs per platform. After you set your parameters, the platform will invest for you and, if you like, reinvest the received principal and interest continuously. This saves time and prevents cash drag.

I will show some screenshots of different platforms that use auto invest:

You can click on each of the four images to enlarge it.

To get help setting up your Auto Invest settings on Mintos, I refer you to my Mintos review as I explained it there, with screenshots.

Secondary market

Some platforms have a secondary market. This is the place to sell your loans. You can sell your loans because you want to diversify better, you don’t like the loan you’ve invested in or you need your money back for whatever reason.

You can also buy loans from other investors here. If you missed out on a loan or project you wanted to invest in, you can check the secondary market to see if someone sells his part in that loan or project.

Sometimes there is a discount or a premium on a secondary loan. This differs per loan, it depends on how the owner of the loan wants to sell his part.

It is worth to check out the secondary markets frequently, sometimes I find real bargains there. But always be aware of the possible motives for investors to sell their loans, sometimes the borrower isn’t paying very well, or the loan is likely to default and therefore investors want to get rid off it.

Be comfortable with all the aspects of the platform first, or try with little amounts of money to experience how it works out in practice. I plan to write a blog post on secondary markets soon!

Conclusion

If you are new to P2P lending, I suggest to read trough the 9 steps in this guide to understand the basics of P2P lending:

If something is unclear or you have questions, please don’t hesitate to comment below or contact me on social media or via email.

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This Post Has 5 Comments

  1. Wow that’s really thorough.

    I would further like to stress the importance of diversification, but also doing your due diligence.
    I’m also diversifying a lot now my P2P portfolio and only bet high on services that are legit.
    It’s good to tip your toe in for experimental things, but with much smaller shares.
    With diversification, there’s a higher chance that one of them will be impacted by “something”. P2P marketplaces aren’t regulated yet, so there can be all sorts of iffy services.

    To add to risks, liquidity risk is one I’d include. If you invest in places like Bondora, where it’s difficult to sell your loans, you might miss opportunities. There are ways to combat this, e.g. by using short-term loan providers such as Swaper and RoboCash, or using marketplaces with a liquid secondary market, such as Mintos.

    1. Thank you for your comment. Diversification and research are really important indeed! I don’t have experience with Bondora, read only bad things about them, so I’m staying away from them :)

      With liquidity risk, you mean that you can’t get your money out quickly? To me, that’s not a risk, as I only invest money that I can afford to lose, not money I suddenly need. I invest to create a passive income, so I just want to put my money in and keep it there. But it might be a risk for some people. Although I do think you should only invest money you don’t need.

  2. Incredible post indeed!
    P2P lending and borrowing is like a digital marketplace for loans. Instead of applying for a loan with a bank, we can initiate a request for a loan from individuals. This concept of peer to peer lending is centered around lenders getting higher interest rates by lending their money instead of putting it in savings and borrowers getting lower interest rates as opposed to getting a loan from a bank.

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