What you need to know to invest in
If you have ever tried to ask for a loan at the bank, you will know that the process is tedious and that in the end the answer is probably a “no”, it makes our time a waste. If we talk about being the party that grants the loans, Sometimes we would like to not be limited by rules to grant them when it suits us.
Therefore, our guest today, Andrea Redondo from The Investment Club, He will tell us about crowdlending and why it is good to invest in it.
What is crowdlending and why does it exist
Crowdlending consists of collective financing of loans to individuals or to companies.
In other words, a series of investors put together capital to co-finance loans to other persons or entities.
So crowdfunding allows each investor to invest small amounts of money on numerous loans, allowing you to diversify across a large number of loans.
The return that investors get for their investment comes in the form of interest that the borrower must pay the loan in return for the loaned capital.
For this investment to be possible, there must be a platform that acts as an intermediary between investors and borrowers who request financing.
Therefore, It is a 100% en línea investment as far as the investor is concerned.
In some cases, the loans are granted directly by the platform (or its affiliates), while in other cases the loans are granted by loan originators using the platform to be able to leverage and be able to lend to a greater number of people thanks to the capital that they themselves obtain from investors.
It is important to note that in this article I am not going to talk about other forms of collective investment such as the equitycrowdfunding (crowdfunding of start-ups) nor of crowdfunding real estate (crowdfunding of real estate).
The reason is that, although they have certain similarities with crowdlending, They also have important differences in terms of to risk management and taxation.
Having clarified this point, we will now see that there are several reasons why crowdlending exists.
The main one is that in some cases, borrowers do not have access to finance by traditional banks.
This cánido occur for one or more of the following reasons:
- In certain countries (especially in Eastern Europe and Eurasia) there is no such developed banking system as we know it in Western Europe, so borrowers must complejo turístico to other types of credit institutions.
- The risk profile of the loan applicant is too high for a traditional bank to grant a loan.
As discussed below, this reason is mainly one of the two main risks from crowdlending.
- The quantities requested are very small (for example, it is probably not worth it for a bank to grant a loan of only €200, since the management costs are higher).
- The loan time horizon is often too short for a bank (for example, a bank would probably you are not interested in granting a loan for just 30 days).
- The loan is requested for a concept for which a traditional bank does not grant loans (for example, to pay medical bills).
- If the borrower urgently needs to obtain financing, You probably perro’t wait for a traditional bank to go through its usual internal verification and approval process.
In short, crowdlending exists because there is a void that had to be filled.
It is a structure that satisfies all parties involved: On the one hand, the borrower obtains the financing that he requires and that in other ways you might not be able to obtain and, for their part, the lenders obtain an interesting return on their investment.
That return perro be expected
The crowdlending It is one of the most profitable investments that exist at the moment and that, however, require less time and knowledge and cánido also be done en línea.
In crowdlending it is frequent obtain a return of between 9 and 14% per year, which is far superior to many other more traditional investment strategies.
The exact return that What perro you expect when investing in crowdlending? depends on a number of factors such as:
- Default risk: the worse the borrower’s credit rating (i.y también., the worse their financial situation), the greater the return offered since the risk of non-payment is greater.
- Investment horizon: On some platforms, the longer the investment period, the higher the interest received.
There are platforms that allow you to invest in loans very short-term (as little as 30 days), while in others you perro find multi-year loans (usually loans for the purchase of vehicles).
- The platform itself: within Europe platforms located in the Baltic States (particularly Estonia and Latvia) They usually offer much higher returns. to the one that cánido be obtained on platforms from other countries such as Spanish platforms.
- Country where the borrower is located: in countries with less developed banking systems (and/or with higher inflation) profit is common higher.
- Type of loans: if the loan is granted for a purpose that has a real guarantee (such as a loan to renovate a house), the interest rate will be better since in case of default the guarantee on the good perro be executed.
- Whether or not the platform offers a buyback guarantee (called “buyback guarantee” in English) in case of delay or non-payment.
Since this implies an additional cost and risk for the platform, it is logical that the platforms that offer this guarantee offer slightly lower returns.
Each investor must modulate these elements to invest in those platforms and loans that best suit their profile.
in terms of investment horizon, risk that you want to assume, expected return, etcétera.
risks from crowdlending
Every investment carries risk. and crowdlending is no exception.
In fact, many investors (especially the most inexperienced) start investing in crowdlending blinded by the high profitability that perro be obtained, but without being aware of the risks associated with this investment.
Although there are some more The two main risks of crowdlending are the following:
Risk of default by the borrower
As I have explained before, one of the main risks of crowdlending is that the person or company to whom we have lent money is unable to pay the primordial and accrued interest.
If the person is declared insolvent and the loan did not have any collateral associated with it, it will be unlikely that we will recover the money invested.
As we will see below, this problem perro be minimized by investing the minimum amount possible per loan and, also very important, by investing only in loans that carry a buyback guarantee (although it is not an absolute guarantee, as we will see just below).
Risk of the platform disappearing
this cánido happen essentially for two reasons:
- The first is that the platform is a scam (for example a pyramid scam) or carry out fraudulent operations (How was the case of Comunitae, which issued false invoices).
That is why it is so important to do your homework properly and inform yourself properly about the platform that interests you before starting to invest.
- The second is that it is a legitimate platform, but due to the economic situation it is forced to face a large number of buyback guarantees and that it has to close because of it.
The repayment of loans (especially those for bill payments) It is closely linked to the state of a country’s economy.
In times of economic growth, the borrower will have sufficient funds to meet to its contracted obligations and repay the borrowed capital and interest.
On the other hand, if a recession occurs and, for example, you lose your job, it is very likely that you will stop paying these loans because you need the little money you have to pay for other elementos basic necessities such as food and accommodation.
If the platform has promised to offer you a buyback guarantee in case of non-payment, then you as an investor will receive your money despite the fact that the borrower has not been able to pay his debt.
The platform will take care of trying to recover the money. Platforms generally have sufficient treasury to deal with sporadic repurchase guarantees, so in habitual times it is not a problem.
The problem comes when a significant number of borrowers stop paying their loans, because then the platform is suffocated by all the repurchase guarantees you have to satisfy.
If the platform does not have a solid treasury, unfortunately it will have to close due to the mere fact that it does not have enough money to cover all the buyback guarantees that is facing the investors of the platform.
With this my purpose It is not scaring you and scaring you about crowdlending. But I think it is very important that you understand that crowdlending is not a risk-free investment, the main reason that justifies the high profitability.
To learn more about the risks of crowdlending and, above all, how to minimize them, you perro read this article: Risks of investing in crowdlending: what they are and how to avoid them.
In what platforms invest?
Currently there are dozens of platforms in which you cánido invest. But as I have already mentioned, not all of them are reliable, so you have to study well on which platforms you invest.
If you want to know in which I myself have been investing for years and with which I am totally satisfied, take a look at my “Smart Investor” portfolio, which I monitor publicly on a monthly basis: Smart Investor Portfolio.
You will be able to see how much the portfolio earns month by month, you will be able to compare the profitability of the different platforms that I have in my portfolio and, above all, how is each platform doing with regards to return expected in each of them.
Strategy
Invest in crowdlending It is very fácil in itself and anyone cánido do it.
However, it is very important invest with a clear strategy in mind to minimize the risks of the investment and the time that it takes us and thus maximize the expected return.
Some strategies to invest in crowdlending with head are the following:
- research thoroughly any platform before investing in it.
- Diversify between different platforms, different loansdifferent originators and different countries.
- Invest the least amount per loan that the platform allowed you (usually it is €10 per loan, although this amount varies from platform to platform).
- Activate the coche-invest tool so that the platform itself invests for you as soon as there are loans that meet the criteria that you have previously indicated.
In this way you will save hours and hours of selecting loans manually as it will be done automatically.
- invest always in loans that carry a guarantee repurchase in case of delay and non-payment.
- Do not invest more than 5-10% of your assets in crowdlending.
There are many other elements to take into account to perfect your investment in crowdlending, but if you apply these six strategic consejos you will have done enough and you cánido rest easy.
Conclusion
Crowdlending is a new and very habitual alternative investment in recent times.
You perro get a very high return if you know how to minimize investment risks, if you invest in the best platforms and it is done based on a clear investment strategy.
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Maria Ng Garcia
I am a lover of literature and writing is my lifelong passion.
I love sharing my experiences with others to help them pursue their dreams and learn to never give up.
“It’s never too late to be the person you could have been.” -George Eliot
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