Crowdlending is also known as peer-to-peer lending, or P2P lending for short, and is the custom of lending money to individuals or businesses, through loans called investments on online services.
Imagine Jórge goes into a store and buys a bike for 500 Euros on a loan, but it’s not the store that lends him the money, but a lending company. So, the lending company, which we will call LendingBank, has loaned him 500 Euros with an interest of 15%. Everybody is happy, Jórge has his Bike and LendingBank will earn interest. But seconds later Jennifer steps in and she wants to buy a scooter for 700 Euros on a loan, but LendingBank already gave their money to Jórge, so now LendingBank negotiates with other investors (you and I) and asks us for money where we get a part of the interest. All the investors are in, because we get an interest on the loan and our money back. So, the investors lend their money to LendingBank which lends them to Jennifer. LendingBank will earn from some fees whilst the investors take home their borrowed money with interest over a given time.
Yes, this sounds a little complicated, because who will set you up and make sure you get paid? Thankfully it’s not that complicated at all, because just like with stocks this is also done through an online service. On the online service the investors get to enter their investment strategy criteria such as estimated: length, investment size, interest-rate, risk-grade, and Buy Back Obligations. You can for example put 500 Euros into your account, say you want to invest with a maximum of 24 months, 10 loans of 50 Euros per loan, solid risk grade, with an 10-20% interest and you want a buy back obligation. Once the investor has put in these criteria the online service starts to find loans that fits these criteria. And just after that you sit back and watch your passive income making you money while you sleep. And better yet, some online services offer the opportunity to reinvest the profits, and you know what that means: Compounding interest.
You keep naming Buy Back Obligation! What is that?! Good question Actually! It is a guarantee for the lender to buy back your loan in case of errors or perhaps delays, let’s say Jennifer can’t pay back her loan, so that would mean LendingBank has to pay you back your invested capital.
So, there is no risk at all? I knew you would ask! But there is a risk, there is the risk that both Jennifer AND LendingBank go bankrupt in that case you would lose your invested capital even if there is Buy Back Obligation. Why? Because there is no one to pay on the loan or buy back your loans as they are bankrupt.
Another risk could also be the currency. If your main currency is trending up and down compared to the dollar or Euro, you might also experience some risk from that.
The last risk there is, is that you have loans in a country that goes to war and get band for SWIFT.. that one is hard to call, but then you won’t get your interest profits either.
What we did is just to keep all loans in Euros, so we have more clearance of the investment’s future.
Okay now it sounds too risky! Not at all, remember we split those 500 Euros into 10 loans of 50 Euros with a solid loan grade? Yeah? That’s why we did it, to reduce risk, again just like with stocks we are diversifying the risk out on 50 different loans from numerous brokers with good loan grades.
So why do we like it? It’s a simple question actually and it’s because it gives a passive alternative to other investments. You will never earn more than your interest but then again you are expected to earn from the interest over time. We are not saying you should go 100% into crowdlending at all, but we keep 10-15% of our portfolio in this manner, as it gives us a clear expectation of our income and we like it when capital is working for us in more than one way.
The platform we use and like is called Mintos, it’s the biggest of the crowd lenders and they offer both Buy Back Obligation and the reinvest program. You can both build your own investment portfolio or use some of the strategies that they use.
So, if you would like to diversify your portfolio and get some of that passive income with compounding interest, I would recommend you using the link beneath to register for an account:
https://www.mintos.com/en/l/ref/QB2WYO
Thank you for your time!
Please contact me if you think I missed out something crucial!
I asked ChatGPT to give me some facts about crowd-lending and this is what I got:
- Direct Lending: Crowd-lending platforms connect borrowers and lenders directly, cutting out the middlemen, such as banks. This can potentially result in lower interest rates for borrowers and higher returns for lenders compared to traditional banking.
- Diverse Borrower Profiles: Crowd-lending platforms often serve a wide range of borrowers, including individuals, small businesses, and startups. Borrowers might seek funds for various purposes, such as debt consolidation, business expansion, medical expenses, or home improvement.
- Risk and Returns: While crowd-lending can offer higher returns compared to traditional savings accounts, it also comes with higher risks. Lenders may face the risk of borrowers defaulting on their loans. Different platforms have varying degrees of risk assessment and mechanisms to mitigate defaults.
- Platform Diversity: There are various types of crowd-lending platforms catering to different borrower and lender needs. Some focus on personal loans, others on business loans, real estate financing, student loans, and more.
- Online Platforms: Crowd-lending is facilitated through online platforms, where borrowers create profiles and loan requests, and potential lenders can review these profiles and choose which loans to fund. These platforms provide transparency, allowing lenders to assess the risk associated with each borrower.
- Risk Assessment: Many crowd-lending platforms use advanced algorithms and credit scoring models to assess the creditworthiness of borrowers. This helps lenders make informed decisions about which loans to fund.
- Diversification: To mitigate risk, lenders are often encouraged to diversify their investments by lending small amounts to multiple borrowers rather than a large amount to a single borrower. This helps spread the risk of defaults.
- Regulation and Compliance: Crowd-lending is subject to regulatory oversight in many countries to ensure consumer protection, prevent fraud, and maintain fair lending practices. Regulatory frameworks may vary, affecting the operation of these platforms.
- Global Reach: Crowd-lending platforms have enabled international lending and borrowing, allowing people from around the world to participate in loans across borders.
- Disruption of Traditional Banking: The rise of crowd-lending has challenged traditional banking models by providing an alternative source of financing for borrowers and an alternative investment avenue for lenders.
- Social Impact: Some crowd-lending platforms focus on social impact and ethical lending. They connect lenders who are interested in supporting causes such as renewable energy, microfinance for underprivileged individuals, or community development.
- Secondary Market: Some crowd-lending platforms offer secondary markets where lenders can buy and sell existing loans before they mature. This adds a layer of liquidity and flexibility to the lending process.
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