Peer to Peer Credits – A short Introduction

left: the word "bank" and stick figures interacting through a single node. right: text "peer to peer credits" and stick figures interacting directly
comparison of lending via a bank and peer-to-peer lending

Peer to peer credits are a special kind of loans: You lend money to other people and these people pay back more than you lent them (you get returns).

The principle is the same as in a bank account: You lend money to the bank and the bank offers returns.

The difference is, in peer-to-peer credits you lend money to other people, not to an institution, you are at the same level as the person receiving the money.

If you’re interested in blog posts about investing, you might also like the ones about stocks, ETFs or real estate.

How do Peer to Peer Credits work?

The innovation in peer-to-peer-lending is using the internet to bring creditors and debtors together. There are various platforms for this (see below for three of them).

There are lists of loan requests, where you as an investor can look at the information and data on the loans to pick the ones applicable to your risk profile.

Fortunately there are bots available that pick loans according to your specification. These autoinvest function spare you the time-consuming analysis of available loans.

How does This Investment work?

There are two key features which make this type of investment profitable:

a) exposing your money directly to the risk of losing the whole investment. This increases the interest rates and the possible payoff.
b) diversifying this risk by investing small amounts in many different credits (many small investments)

This combination leads to an attractive gain/risk profile. Another contribution rendering peer to peer credits profitable is the so-called “arbitrage”. The interest rates differ within Europe. Investing in other countries with higher interest rates is at the moment simply more attractive than investing at German interest rates.

What are the chances?

As mentioned before: Interest rates are higher than within other investments where you lend you money to someone else, more than 15% return is possible.

What are the risks?

Each investment comes with a risk. And P2P-investing is often classified as a high risk investment. They’re a young type of investment and there was little time for risks to kick in. There is less experience with this type of investment.

This list of risks is most certainly incomplete:

  • risk of loans not being (fully) paid back: the person who borrowed the money can’t pay it back. This is the obvious risk.
  • risk of platform bankruptcy: When a platform goes bankrupt, it doesn’t handle the credits any more. It’s possible that you don’t get you money back. You probably won’t be able to withdraw your investment for some time.
  • losses not necessarily tax-deductible, while gains are taxed:

Numerical Example: You invest 500 € at 20% interest rate. You receive 100 € in interest. Meanwhile 80€ of loans are not paid back. Therefore, your gain was 20 €. If the interest is taxed (in Germany at 25%) without the possibility to deduct the losses, you would have to pay 25 € in taxes, although you only earned 20 €.

Therefore you’ll not know how profitable your investment was until you get the report on your tax declaration.

Experience

In order to spread the risk of platform bankruptcy, I used different platforms to invest in. The first criterion to choose them was the smallest possible investment in a single loan. If it’s smaller, the diversification increases.

Bondora

Bondora* is an Estonian platform with a very low minimal investment of 5 €. They have lots of statistics and charts available and you can define your risk profile very precisely.

About a year ago (in May 2016 ) I started investing there and return are very promising. They slowed down a little in the past few months.

*The link with an asterisk is a refer-to-a-friend link. If you start investing money after clicking this link, you’ll get your first investment of 5 Euros for free and I get a bonus based on your investment

Mintos

Mintos is a Latvian platform with a minimal investment of 10 €. The user interface is less appealing than the one of bondora, but you can still define your risk profile.

I also started investing about a year ago (in May 2016 ) and the return was eclipsed by bondora, but Mintos kept its pace and it’s about to catch up.

If you want to start investing at mintos, you can use the promo code 5Z4ZUB which is valid until 07/07/2017. Then both of us will get a bonus.

Twino

Twino is a Latvian platform with a minimal investment of 10 €. They wrap up the credits more than the above mentioned platforms and offer them at constant interest rates. Credits with buyback guarantee (= low risk) seem to be on the rise here.

I started investing in January 2017. The availability of credits without a buyback guarantee did not meet my expectations, therefore I’m currently pulling my money out again.

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