How to Lend Money for Profit
The idea of lending money for profit has long been around. As a result, many successful companies have built their business strategy based on lending money to businesses or private individuals. But, while lending money to a friend can be done without much hassle, with a simple written loan agreement, lending money to thousands of individuals requires lending licences, and these are given out by regulators.
If you want to lend money in the UK, you must be authorised by the FCA. The same applies to lenders within the EU. Bondora, one of the biggest P2P platforms in Europe, for example, is regulated by the Estonian Financial Supervision Authority.
Brilliant, so why don’t we all just become authorised lenders? Well, obtaining a licence comes with many requirements and, usually, high costs.
Still thinking about lending money for profit? Great. Because we have a solution for you and it’s called P2P lending.
Hold On.. What is P2P Lending?
Peer-to-peer lending is a form of investment, where people lend money to borrowers and accrue interest as a result. This is a completely legal and legitimate form of lending, and it can be done from your home without much bureaucracy. P2P lending online platforms will provide you with the necessary assignment or loan agreements to ensure all the legal and technical components are met.
Sounds good, right?
In this tutorial, we will inform you about five steps that you need to take in order to best utilise P2P platforms when lending money for profit as an individual investor.
Without further ado, let’s get into it!
1. Educate Yourself About P2P Lending Risks
Before you start investing in P2P loans, it’s important to gather some knowledge about the risks involved with P2P lending.
As you might know, lending money to people or businesses isn’t risk-free. There is a lot that can go wrong and you should be aware of this, in order to avoid bad investments.
Here is an introduction to the risks connected to P2P lending:
Platform risk is the most important factor to evaluate, when considering whether you should invest on P2P sites and deciding which platform is best for you. Why? Because fraudulent platforms have been the number one reason why investors have lost millions of euros in the P2P lending space.
All four platforms offered investment opportunities in business loans. Unfortunately, many of those projects were found to be fake and the ponzi scheme of the platform was exposed. This fraudulent behavior damaged the reputation in the whole P2P lending industry.
Want to read more on this? We have analyzed the behavior of P2P lending scams and created an actionable guide which will help you to reduce the risk of being scammed by a P2P lending site.
Loan Originator Risk
After platform risk, it’s important investors consider loan originator risk.
Investors often use P2P lending marketplaces such as Mintos to lend money for profit. Mintos isn’t a traditional P2P lending platform since it collaborates with lending companies (also called loan originators) rather than directly with borrowers.
Adding a ‘middle man’ into the lending model brings another risk factor as there is more that could go wrong with the transaction - now, not only could the platform itself be fraudulent and go out of business, but so could the loan originator.
This risk is very real as P2P lending marketplaces such as Mintos list more than 60 loan originators from 33 countries.
Jeez, that’s a lot to keep up with!
Sooner or later loan companies might go out of business for various reasons.
List of possible reasons
- Their lending licences have been revoked in the country where the company operates
- Poor due diligence leads to higher default rates
- Implementation of strict regulations for payday loan lenders
It’s important that you do your own due diligence about individual lenders; checking their loan books and analyzing their financial report might lower the lender risk.
Some P2P marketplaces introduced ratings for their loan companies. You can use this lender rating to define your investment strategy, which will also help you to lower the render risk.
Although it may seem obvious, so much money is lost as a result of borrower risk: if you want to make money from loans, you need to make sure that the borrower is able to repay their debt. P2P lending platforms such as TWINO, NEO Finance or Bondora give users access to borrowers’ data, from which you can determine the risk and return - whether the risk of investing into those loans is worth the possible gained interest.
When analysing the risk and return, you can also look at metrics such as:
- Loan amount
- Loan term
It’s not easy to evaluate the risk of every loan, however, the risk of an unsecured personal loan defaulting is likely higher, as a real estate loan secured by a mortgage.
Just like with any kind of investing, when making P2P investments you need to account for risks that you won’t be able to influence: those external factors. An obvious and relevant example is the coronavirus, which has not only impacted the stock market and other more traditional forms of investing, but has also had an impact on the P2P lending space.
So, what happened?
Well, Covid-19 caused a ‘bank run’, which was effectively when people started withdrawing their funds and liquidating their investments. This led to the exposure of ponzi schemes and loss of capital.
The worldwide quarantine will also increase the default rates as many borrowers lose their jobs and won’t be able to pay back their loans.
One positive that we can draw from coronavirus, however, is that P2P lending scams have been exposed and many lending companies have adjusted their credit rating criteria which will lead to higher quality borrowers.
Also the demand for investments in P2P lending decreased which led to the increase of interest on many P2P platforms.
2. Choose a P2P Lending Platform
Now that you are aware about the risks, let’s choose a P2P lending platform that you can use to lend money to others.
If you are just starting out with P2P lending, we suggest registering on platforms such as Mintos or PeerBerry. Those two platforms are established and legitimate P2P lending marketplaces with proven track records and very good performance, even during a crisis like the one we’re in now.
As a beginner, you want to start investing with lower amounts. You also want high liquidity, to be able to withdraw your investments in case you need them.
Both Mintos and PeerBerry are very easy to use, which makes lending money online an available option to everyone.
If you are looking for more alternative platforms, head over to our list of the best P2P lending sites.
3. Register and Transfer Funds
Before you start lending money on any P2P lending site, you need to register and transfer funds.
US investors can sign up to both platforms, however, do note that you need a European bank account in order to follow the strict anti-money-laundering (AML) regulations. In order to open a bank account, you can simply create a borderless TransferWise account or open a euro account with the German Bank N26. You can also choose any other bank that is based in the European Economic Area.
The easiest and cheapest way to transfer funds to any P2P platform is by using the SEPA transfer.
Platforms like Mintos or PeerBerry will usually process your payment within one banking day. Other platforms might take up to three days.
4. Invest in Loans
In order to start making interest from lending money, you need to invest in loans. With P2P lending, you have the choice to invest in real estate (loaning real estate developers), businesses or lending money to borrowers via P2P marketplaces. And if you’re just starting out, the latter is the easiest means of making money from loans.
So, here are some tips we’ve gathered in our years of doing so...
Auto Invest Tools
If you have registered on one of the P2P marketplaces for personal loans, you might use their automated investment strategies, also called an auto invest tool.
Every platform has its own auto invest, but they each have different means of allowing the investor to define their loan criteria.
On PeerBerry for example, you can define the following criteria:
- Portfolio size
- Maximum investment in one loan
- Minimum funds in account
- Interest rate
- Remaining loan term
- Remaining loan principal
- Buyback guarantee
Additionally, you can also exclude certain loan originators if you decide you don’t want to invest into their loans.
Mintos’s Auto Invest Feature
Mintos’s auto invest tool offers more diversification than the average, which is why you can also choose to invest in different currencies. You can also define whether you want to invest on the primary market (loans from lending companies) or secondary markets (loans sold by other investors).
Mintos also lists much more loan originators, which is why you should exclude the ones that might potentially be too risky. The platform also allows you to diversify equally across loan originators.
If you don’t want to spend time setting up your auto invest on Mintos, you can also use their Invest and Access tool which allows you to invest with only one click. You can learn more about investing on Mintos in our Mintos review.
Tip: If you are new to P2P lending, we recommend diversifying your investments across as many loans as possible. You can do so by investing a maximum of €10 in one loan.
5. Earn Returns & Track the Performance
Congratulations! If you have made it up to this point, you are ready to earn interest by lending money.
You are aware of the risks and you know how to avoid P2P lending scams which is already more than most P2P investors know.
Now, one last thing: once you’ve earned the returns, it’s time to track the performance.
Why? Because, it’s crucial to ensure the profits continue to amount.
Every platform will give you some statistics about the status of your P2P investments.
Check the following data
- You should make sure that you don’t have too many delayed payments, as on some platforms, you won’t earn interest for them.
- You should withdraw money regularly to make sure the withdrawals are working. You should follow up news around the P2P lending sector to adjust your investment strategies
- You should keep an eye on the platform’s development (read our regularly updated individual P2P platform reviews to keep up to date with platform changes).
The above-mentioned points will help you to keep your returns and avoid losses.
If your goal is to make profit, you should always keep an eye on your investments.
While P2P lending is often promoted as a form of passive income, it’s not entirely true as many investors lost money by not taking action early enough.
P2P lending can be a very profitable way to increase your returns by lending money to others. It is, however, similar to all other types of investment in the sense that it is not risk free.
We at P2P Empire aim to educate our readers about all aspects of P2P lending, so you can make wise decisions based on factual data and industry know-how.