25. September 2021

P2P lending, funding & investing – FAQ

Everyone is talking about P2P loans and the top returns you can get from them. But what is a P2P loan and how does the private-to-private loan system work. Here’s a little FAQ on P2P loans.

What is P2P?

It’s basically quite simple. P2P means nothing more than private-to-private. Translated into German, it simply means “from private to private”. So with P2P loans, one private person lends money to another private person. That is the basic concept. This is made possible by many private individuals making the money available to a borrower as a group.

But there are also P2B (private-to-business) providers. Here, business projects are financed by a large number of small investors (via Funding Circle). In the field of P2P loans, there are basically three major areas of crowdfinance:

  • Crowdlending
  • Crowdinvesting
  • Crowdfunding

In all these areas, many small investors come together with amounts starting at €5 and invest or support large projects. The whole thing then works via certain platforms.

How does P2P work?

The way private-to-private works is as simple as the system. Borrowers and lenders meet on a platform. The lender (investor) has the money that he wants to invest with interest. The borrower needs the money for a project. So here the platform acts as an intermediary and brings borrowers and lenders together. In these cases, however, there are many small investors who participate in a project with amounts starting from 5 €. In some cases this investment is done manually, in others the whole process is automated (portfolio manager).

Why invest in P2P?

The reasons of each investor are different. This can be on the one hand the yield and on the other hand interesting projects. On some platforms, for example, only ecologically sustainable projects are offered. There are also platforms that only handle real estate transactions. The reasons are numerous, but the idea is not new. In the past, banks took over this task.

Banking vs. P2P?

The system is not new. A few years ago, the main task of banks was to make the money you receive available to borrowers. Over the last few years, banks have increasingly withdrawn from the “microloan” business. This vacuum has been filled by P2P providers. So you see, the P2P lending system is not new. You just didn’t have to actively take care of it in the past, your bank did that.

What is the possible return on P2P?

The chances of return are possible from total loss to 30% (“even above”). I myself have a return of about 15% with private-to-private loans. On average, the return settles at 12 %. However, there are also exceptions that achieve a return of over 25%.

What to look out for in P2P?

Even though banks have been using similar models for more than a hundred years, you should not ignore the risks. The returns are very high, therefore the risk is also high. With P2P loans, there is market risk, country risk, system risk, platform risk, and borrower risk. You can minimize all of these risks as long as you diversify. The only risk you cannot minimize is if the government prohibits investing in P2P.

What is a loan originator?

On some platforms, there are also the “loan originators”. These initiators pre-fund the loans and then make them available.

The advantage of this is that it is already possible to invest in fully funded loan projects.

This speeds up the process considerably. With Auxmoney, on the other hand, it is always first checked whether there are enough interested parties. With a loan provider, this is no longer necessary.

What is Buyback?

Buyback is a type of insurance for P2P loans. Depending on the platform, there are different forms. Buyback means that the company that brokered the loan buys it back. The company then takes over the collection and settlement. Buyback is thus something like an insurance policy against loan defaults. When the buyback takes effect varies, at Mintos and TWINO the buyback takes effect after 60 days of default.

Do I have to select the loans myself?

Yes and no. There are providers who use a portfolio manager. With some the manager is more pronounced, with some not. This varies from platform to platform. You can get an overview of the known portfolio managers here. However, when selecting manually, you should take a close look at the credits. Furthermore, a manually diversified portfolio is very time-consuming.

What is the secondary market?

Some providers have a secondary market on their platform. On this secondary market you can buy and sell loans. There are some users who achieve returns of up to 50% with this. On the secondary market, you can make good bargains with some providers. This is because loans are also offered on the secondary market when short-term liquidity is needed. You could also call the secondary market an exchange.

Are P2P interest income taxable?

Yes they are. You can get an overview of the tax issue here.

Hint: This FAQ is only intended to provide information on the topic of crowdlending. The offer on this page does not constitute an investment recommendation or solicitation. There is risk associated with investing in private-to-private loans. Inform yourself in detail about the investment form and invest only money that you do not need in the long term.