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Is peer-to-peer lending something for us?

Do you remember our recent post “There is no free lunch” and how we have learned that if something looks too good to be true, then it IS too good to be true?

When it comes to investing in p2p loans, and especially those with buyback guarantee, we have a bit of the same feeling. We are very curious about the product, but we are at the same time looking for the catch in what we immediately think is too good to be true (loans with a high return and promised buy-back guarantee?!). After researching the product for some time we have chosen to give it a shot and as you could read in our last portfolio update (Portfolio update – April 2018) we have now invested 10.000 DKK (USD 1.600) in p2p loans via the platform Mintos.

Concerns
Let us be honest, we had (and still have) some concerns about going into this area of investing. We have tried to list our concerns here:

  • Limited history: Most of the p2p platforms are relatively new, which makes it difficult to guess how a financial crisis or downturn will affect the originators and platform (and your investment).
  • Platform or originator folds: Again due to the lack of history it is hard to estimate the consequences if one part folds.
  • Ponzi scheme: Is it all a scam, where new members deposit covers the return giving to the existing investors?
  • Buyback guarantee: Investing usually comes with a risk and the greater the return, the greater the risk. Having a buyback guarantee eliminates the risk and leaves you with a good return. It seems too good to be true.

It is a lot of concerns, but we guess that’s natural when the area of investing is still quite new. We have chosen to invest using Mintos, as the platform seems very professional, there are good explanations of what happens if someone folds, and it is easy to diversify your investment between lots of loan originators, minimizing the credit risk. On top of this we chose the platform, because of the buyback guarantee. And is this guarantee too good to be true? We don’t know, but taken into consideration that the loan originators charge the borrowers a much higher rate than the rate offered to us (we have seen anything between 30% to 760%), it makes somehow sense that it is possible.

Platform
The first thing we did after deciding to use Mintos as platform, was to create an account. It took us about 5 minutes and was super easy. The next step was to transfer money and get started and here we encountered a few questions:

  1. Transferring money to Mintos: Should we transfer money to a danish or euro account? (we knew we wanted to invest in euro loans). The easy answer is: It doesn’t matter. You can easily transfer money between Mintos accounts, BUT it will cost you a fee every time you do it.
    An example: To exchange DKK to EUR will cost you a fixed fee of 0,50%. We chose to transfer money to a DKK account at Mintos as this was the easiest (domestic bank transfer) and free of charge. To invest in euro loans the money needs to be in a euro account, so we exchanged the money to EUR using the currency exchange functionality Mintos offers. This was a bit more expensive than making an international bank transfer, which we probably will do next time, if the amount is big enough (otherwise it is still cheaper to exchange at the platform).
  2. Setting up autoinvest: Which setting to choose? This is tricky, because there is no right way to set up the autoinvest. It all depends on you preferences and risk profile, but here is how our setup is:

    Currency: EUR
    Originators: All
    Buyback guarantee: Yes
    Interest rate: 10% – max
    Remaining loan term (month): 0 month – 13 month
    Investment in one loan: 10 – 15 euro
    Do you want to reinvest: Yes
    Include loans already invested in: No
    Diversify across loan originators: Yes

    Overall we want to earn at least 10% and we don’t want to bind us for more than 13 month, as the product is still new for us. How much it should invest in each loan was a bit difficult for us to decide, as we wanted it to be low (to spread the risk) but at the same time it shouldn’t be too low and cause that it was impossible to find enough loans. The 10-15 euro suits us for now. We invested around 1.300 EUR and it took the autoinvest about 4 days to invest all of them.

We are now up and running and are excited to see what it brings. Already at day one the interest started hitting our account and to be honest, we are big fans of earning interest on a daily basis. Let’s see where it will bring us. We will give a brief update on the project in our next portfolio update.

 

4 thoughts on “Is peer-to-peer lending something for us?

  1. Welcome to peer to peer and Mintos:- ) I was a little wary about p2p initially, given how long the industry has been around. But it’s working out well so far (touch wood), after a year and a half with Mintos.

    The nice thing about Mintos/ p2p is the ‘set and forget’ set up. However, remember to log in every now and then to your auto invest feature. So, you can add new countries or loan originators Mintos may have incorporated on their platform. They have 21 countries/ 37 loan originators (all with buyback guarantee) at this stage!

    This way you can really diversify your funds and potentially increase your return on investment…

    My rule of thumb/ approach to risk is investing only 5% of my net worth in P2P. Good luck with it all.

    1. Hi Stefano.
      Thank you for the advise, we have now chosen all of the originators as two new had arrived since we set up the auto invest. Have you chosen all of them or do you have experience of staying away from some of them?

  2. Nice post. I just did something and wrote something sort of similar. So far returns have been good but it’s early days and there’s no long term track record of what happens when someone goes bust.

  3. I’ve chosen every loan originator that has a buyback guarantee. So far so good…
    One other caveat re peer to peer, is exiting a platform. Well, at least one platform in particular. Any defaulted loans can’t be sold straight away and may take months to clear. It’s not a big deal, as the defaulted loans account for 6% of my fund value. I will sell them eventually.
    Then again, my strategy going forward won’t involve selling out. I was only experimenting with this other platform. Once I build up enough cash in Mintos and finish my accumulation phase, I’ll withdraw around 10% per annum (or just below the current ROI) and keep the fund ticking over….

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