Crowdlending As An Investment Opportunity
Crowdlending or peer to peer lending, P2P lending, or marketplace lending is an investment option that is quickly gaining popularity and attention across the world. The concept originated in Europe where the sector is experiencing faster growth and started to establish itself positively.
If you are looking to invest in Crowdlending, then continue reading this article to learn more about it and how to start.
Definition of Crowdlending
In simpler terms, Crowdlending is an investment opportunity where the platform matches borrowers and lenders and everything is regulated online. Examples of Crowdlending platforms are Mintos, Grupeer, Crowdestor, and Monethera among others.
Crowdlending or peer to peer lending allows all kinds of investors – small or large to lend money directly to the borrowers and earn interest every month.
How it works
Crowdlending functions through an online platform, which matches borrowers from a loan originator with lenders or investors. The platform provides detailed information about the borrower, investment, the loan originator, expected returns, creditworthiness, and the risks. This means that you can choose loans according to your risk profile.
In some cases, the loan originator has already approved the borrower and established the loan. The loan originator typically invites the investors on the p2p lending platform to fund the loan and will offer a share of the return.
As an investor or lender, you don’t have to worry about the central bank meddling with your returns, which is common with bank savings.
Most peer to peer lending offers between 11 and 13% per year on average. Mintos, the leading peer to peer lending in Europe reports an annual pre-tax rate of return of 12.11%, while Grupeer 14.42%.
Benefits of Crowdlending
One of the reasons why Crowdlending is so popular is its perk of benefits.
- Most p2p lending platforms charge a very small fee to the loan originator, which is passed on to the borrower, but not an investor. If at all the investor is charged, it is not going to exceed 1%, which is quite low compared to the double-digit returns.
- Low entry barriers, with as little as 1 EUR minimum investment, meaning anyone can start right away.
- Good rates of returns for investors with an average of 10% per annum with low risk involved.
- Crowdlending is fast because the platforms are created by digitally savvy individuals who know how to create a simple, fast application for users. Investment is usually approved within minutes and the platforms updated with the latest data constantly.
- Crowdlending is simple and transparent, unlike traditional banks where there are lots of paperwork and hidden fees. Most peer to peer platforms have an entire dedicated page for how they make their money and the fees they charge.
- P2p lending is safe as most platforms do not reveal the identity of the parties involved. Communication is also encrypted and accounts highly secured.
Types of Crowdlending loans
In general, there are three types of loans in Crowdlending:
- Personal loans are the most common types of loans in Crowdlending. They are usually unsecured and can be used for a number of ways, and for this reason, it is important for investors to ask for buyback options.
- Business loans are the second type of loans in peer to peer lending. As the name suggests, they are borrowed for business purposes. They are usually large in size compared to personal loans.
- Real estate loans are the last category of loans in peer to peer lending. It is usually for buying or renovation properties that are either rented or sold to earn revenue.
Risks involved in Crowdlending
Unfortunately, Crowdlending has some risk that, as an investor, you need to be aware of. They include:
- The default risk: this is the most common and more likely to occur risk associated with Crowdlending. The borrower may default on the loan or pay late. However, if you find a platform that offers a buyback option, then this risk will be averted.
- Geography is also a factor since most of the platforms in Europe do not allow investors from other countries.
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