Crowdlending (also referred to as peer-to-peer or P2P lending) is the concept where individuals (lenders) pool funds together to lend money to other individuals (borrowers), typically brokered by an online platform. This form of lending is bypassing banks or other financial institutions.
One such crowdlending platform is European based Mintos.com, which is the first platform I am investing on. It’s a platform allowing you to invest in individual loans that are originated by lending companies.
In return for financing a loan you receive a return on your investment – in the form of interest.
Disclaimer: I do use affiliate links, but I am in no way trying to promote investing in crowdlending nor Mintos for that matter. As with any investment, it is up to the individual to decide whether or not it makes sense, depending on risk tolerance, investment horizon, existing portfolio, etc. But in this post I will share some of my considerations and explain why I believe crowdlending is an interesting opportunity for investing some of my funds. This post refers to Mintos as it happens to be the first platform I am ‘testing’, but it will by no means be the last platform I will write about. And I won’t hesitate to share any experience I have with them, both good and bad.
My main considerations for investing in crowdlending:
- I want a portfolio that is diverse and spreads over different asset classes. I already have real estate (equity in my home) and stocks (my company’s stock). And although I want to invest more in stocks (via index funds or trackers), I am also looking for some more non-correlated, alternative assets to invest in.
- Crowdlending has the potential to give a more than decent return (close to 10% or even higher).
- Risks exist (as with any investment), but can be mitigated to a large extent (more about this later)
- I love the idea of passive investing. On Mintos I can automatically re-invest any principal and interest that I receive (using their auto-invest option).
Does it work?
Yes. Well, that’s what my research says. I have only recently joined Mintos.com and my investments have yet to generate a return, but I have no reason to believe that the positive stories I read about this platform aren’t true. They’re a big, stable player in Europe, headquartered in Riga, Latvia. They have an excellent rating on Trustpilot.
On my website I will give you a monthly portfolio update on all my investments, including those in crowdlending. So if you want to know how it is going and whether investing in crowdlending could be something for you, all you have to do is subscribe and follow along.
Let’s make a simple calculation. If you invest $200 each month ($2400 annually) and the annual return is 10% you will have nearly doubled your investment after 10 years and your monthly interest will be around $370. Add 4 more years and you’ll get close to $650 a month.
This simple calculation has nothing to do with crowdlending. It is just what a 10% return (that you re-invest) can do for you. It’s the power of compound interest (interest on interest).
Why is this interesting?
What I want to do is to generate a steady, passive income stream to realize my ‘financial independence dreams‘. In other words, I want my money to generate a predictable, stable return. The closer I get to early retirement the more important this will become. There are several ways to achieve this and I want to explore them. Crowdlending is one of them.
But let’s dig a bit deeper.
The crowdlending concept
The following illustration shows you how crowdlending on the Mintos platform works. Multiple loan originators provide loans to borrowers and place it on the Mintos platform (marketplace) for investors to invest in.
They will never place the entire principle amount as Mintos requires loan originators to keep ‘skin in the game’. This means that loan originators are required to keep an equity stake in the loan. This ensures that the interests of the originator of the asset are aligned with the interests of you, the investor. Both sides have a stake in the investment after all.
Are there risks?
Yes. As with any investment.
Let’s start with the borrower. They can default, which means they are not paying future/scheduled payments. Depending on whether the loan was secured (backed by collateral) or not (not backed by collateral), you may lose (part of) your investment.
This risk can be mitigated however by only investing in loans that are offered with a buyback guarantee. In case payments are more than 60 days late, the loan originator will repurchase the loan from you. This guarantee is given per loan and you can recognize it by the symbol.
In case of a buyback, the loan is bought back by the loan originator at the nominal value of outstanding principal, plus accrued interest income.
I only invest in loans with buyback guarantee. It means lower interest, but I don’t want to risk losing my investments due to a default.
Loan originator goes out of business
That’s a real risk.
This is what Mintos writes on there FAQ page:
In the unlikely event that a loan originator goes out of business, we have put in place arrangements to ensure that investors continue to receive payments on the loans in which they have invested in through the Mintos marketplace.
That’s not very precise. Depending on the loan agreement it may take more or less time to get your funds back. If you get them back.
But there a couple of things you can do to mitigate the risk:
- Diversify your portfolio over many different loan originators
- Select loan originators with low risk rating
The risk rating is published by Mintos. See below:
You can also find various blogs and websites with independent ratings.
I used a combination of the above. Diversification across loan originators and only invest in loan originators with an A to B risk rating.
Crowdlending platform folds
I guess that could happen.
One advice: Diversify across multiple crowdlending platforms. I am not that far yet, but will definitely spread out my investments.
As far as Mintos is concerned, they have been in business for quite some years and is a major European player. I do trust them. But diversifying is just common sense.
Cash flow timing
As with any loan, the borrower may be late with payments. This can affect your cash flow. Depending on the circumstances and agreement, you may get compensated with late payment fees however.
Personally, I am not too concerned about this. Late payments are hard to mitigate, but as I am spreading my investments over many loans, the impact can be reduced.
Once you have invested your funds in a loan you have to wait for it to mature to get your entire principal amount back. This means that if you invest in a loan with a remaining term of 24 months, it will take 2 years.
For me this is no problem. My investment horizon is 10 years and I am happy to lock my investments. I have even enabled the auto invest option on Mintos to get any repayments re-invested immediately.
Mintos does have a secondary marketplace where you can sell your investments for either a premium or discount.
Once I get closer to early retirement however I will adjust the auto invest option and make sure I will be able to withdraw monthly funds from my account (you can set an auto invest limit).
My Mintos Account
My account looks as follows (November, 2018):
As you can see, I have only received a tiny return, but that’s because I just signed up. I will keep reporting on the results in upcoming portfolio updates.
Currently my investments are spread out over 50 loans. The distributions (country, loan originator, interest and term) are shown below:
My loans are currently only spread out over only 5 loan originators. The main reason for this that I am at the beginning of my learning curve. I didn’t setup the auto invest feature in a way so it generated the desired results. But from now on it should get better.
There’s one loan that is 31-60 days late. I’m curious whether I get to see the buyback guarantee in action.
I will not jump to too many conclusions about Mintos.com as I have yet to see results. But I am optimistic and will definitely keep you posted on the progress. Overall I am happy with their website and the ease of use.
Crowdlending as an investment option is a great way to diversify my (not so diverse) portfolio. It’s an interesting, alternative asset that promises some good returns. And what is best, it’s a passive investment. I can just sit back and relax and see my money work for me instead of the other way around.