Crowdfunding #2: P2P lending - an attractive option?
In crowdlending, many people get together to lend money to others. It is sometimes referred to as peer to peer (P2P) lending.
HERE TO STAY
More and more people are involved in this area. According to Statista, the volume of transactions in the Crowdlending (Business) segment in 2018 is approximately € 609 million. Forecasts for the year 2022 predict a transaction volume of € 2,681.0 million. This corresponds to an annual growth of 44.8%.
WHAT IS CROWDLENDING?
Let's break it down: "crowd" means swarming and "lending". Many individuals give credit to other individuals. For this purpose, a crowdlending platform is used. Imagine that you need a loan, but you will not receive any from your house bank or only on unfavorable terms (high interest rates). In this case, you can contact a crowdlending platform. The whole thing works the other way round too: you can lend money to other people through a platform. The whole thing has an economic benefit: Crowdlending earns you more interest than leaving the money in your savings account.
HOW DOES IT WORK?
The crowdlending platform classifies you as a borrower by assigning you a risk category. The central question for the crowdlending platform is: are you able to repay the money on time or not? If you are a lender, you can use the platform to view various loan projects. This information helps you to decide if you want to lend money and to whom.
Example: Eva signs up as a lender for a crowdlending platform. She finds a project by Isabell. Eva lends Isabell 500 €, but Isabell Eva pays back the money in monthly instalments plus interest.
HOW DO THE CROWD LENDING PLATFORMS MAKE MONEY?
One model: The platform retains a portion of the loan amount for its own purposes. If you lend 10,000 €, the borrower may only receive 9,990 €. Another model: For each month that a borrower (Isabell in the example) repays the loan, the crowd lending platform estimates a small proportion of the loan amount, e.g. 1%.
HOW MUCH IS IN FOR YOU?
Most crowdlending platforms advertise at 5-6% interest. This is an attractive offer in the current low interest rate environment.
What are the risks?
Borrower defaults: A risk is that the borrower can not repay the sum. In this case, you can go to court. If the borrower is unable to pay, there is a risk that you will not get the money.
Platform bankruptcy: In addition, there is the risk that the crowd lending platform will go bankrupt. In that case, you do not necessarily lose your money, but it would then have to be clarified how the repayments are handled.
WHAT IS THE TIME HORIZON FOR LENDING?
That varies. There are platforms that offer shorter terms like half a year. Others are 1 - 5 years old. Only lend money that you do not need and that you are not dependent on. So please do not touch your nest egg!
HOW MUCH CAN I INVEST?
That depends on the provider. You can partially lend money from 10 €. Some providers have set a minimum of € 250. Borrowers in this case receive their credit from many different people. The average loan amount in Germany for crowdlending platforms is around € 27,000.
WHAT ARE THE MOST POPULAR PROVIDERS?
In Germany, auxmoney, funding circle, exporo or even mintos are very popular. In Switzerland there is Lend or crowdhouse.
IN A NUTSHELL
Generally, crowdlending is a good idea. Since you can often choose the projects you want to support financially, you can diversify your risk. You can deposit in many different projects. This minimizes the risk of default that a borrower becomes insolvent. Nevertheless, there is a risk. So think about whether you can spare the money.
Written by Clara Creitz
Finelles Founder. Coach and Consultant (UBS, Towers Watson).