What is crowdlending?

What is crowdlending? This is my guide to what crowdlending is

Crowdlending is becoming more and more popular across the globe because it gives high returns to investors. But what is crowdlending exactly, and how does it work?

Many investors do not want to put their money into crowdlending, because they think the concept behind crowdlending is hard to understand. I think that is a shame because crowdlending – or P2P lending, which some calls it – is smart and gives a high return.

At the same time, I know crowdlending can be hard to understand at first glance. But to be honest, crowdlending is pretty easy to understand when you just read a simple guide explaining the concept.

So that is what this article is all about. It is just a simple article explaining what crowdlending is, so you hopefully can understand it and later wants to invest your own money into it. In this article, I will explain what crowdlending is, how it works and why it has become so popular for investors across the globe over the last years. At the end of the article, you will also be able to see my portfolio in crowdlending, and how it has developed regarding returns. Let us get started.

P2P Lending: What is crowdlending?

At first, it is important to say that crowdlending has many different names, and depending on who you ask they will maybe call it something else. The normal terms of the concept behind crowdlending are P2P lending, Marketplace Lending, P2P Loans and of course just crowdlending. Despite the different names the concept and meaning are identical, so it does no matter what you call it.

So what does above-mentioned mean?

Crowdlending is basically a way of lending money to individuals and businesses without the influence of banks. That means that you as an individual can lend money to other individuals and businesses through crowdlending platforms. In return, you receive an interest rate for lending your money to these individuals or businesses.

These loans, which you help to finance along many other people and businesses, will often be quick loans, consumer loans, car loans or mortgages to individuals as well as loans to businesses to help them expand.

Crowdlending have occurred over the past years mainly because of the existing banks. After the financial crisis, many banks stopped to lend out money to many different people as well as businesses. At the same time, it is often very expensive and very complicated to loan through banks. That is also why crowdlending is relatively new.

By that reason, crowdlending if often cheaper, faster and makes loans available for more people. And because of that, investors like you and I have the possibility to invest in loans with high interest.

A video explaining crowdlending as well as the concept behind.

Why use crowdlending platforms?

You will basically be able to lend out your money yourself. Maybe you know a person, who wants to buy a new car? Or a person, who needs some cash for the next month? Then you will be able to lend them some money directly, and in return, you will receive interest. That’s nice.

But it is also time-consuming because of the legal stuff, and it is also only possible if you know any individuals or business, who is in the need for money. What if you do not know anyone in the need of cash? Then you do not have anyone to lend your money to.

That’s why there are crowdlending platforms like Mintos, Bondora and Envestio.

Crowdlending platforms connect lenders to borrowers. By that reason, you can say that crowdlending platforms have the same role regarding loans as banks normally had. They are some sort of intermediary between the
lenders and borrowers, why these people never meet each other.

That’s also why somebody calls crowdlending P2P lending because it is working peer-to-peer.

Furthermore, the crowdlending platforms also handle all the practical and legal stuff. For example, they pay out the loans to the borrower, and afterwards, they also pay your interest to you along the original loan.

That means you only have to deposit your account – and then pick those loans you want to fund. Sometimes you can even let the crowdlending platform pick the best loans for you according to your own criteria for the loans.

However, sometimes the crowdlending platform does not connect you to the borrower directly. They connect you instead to loan originators, whose job it is to lend out the money. That is for example how Mintos works, but the concept is basically the same.

The crowdlending platform takes, of course, some of the interest in fees, but their fees are very small (because they have so many different lenders and borrowers). At the same time, the interest you receive is so high that I personally do not ever think that the platforms is actually taking a fee. I do not think you will think about it either, because you will be more than happy about that interest you receive.

Many of these platforms have billions invested in loans through their services, and over the years they have paid millions back to lenders in interest. Some of these platforms are even regulated by normal national financial regulative agencies. Because of that, crowdlending is not risky business.

To be honest, I am never nervous because I have invested in P2P lending. I consider it safe. However, I have only invested in big platforms with many years in operation, but still.

Interest rate through crowdlending

That leads me towards the most often question I receive: “What is the interest rate through crowdlending?

I normally just answer: “It’s good. It’s really good“. Because it is.

It is not abnormal that you will receive an interest up to 15% each year through crowdlending. Because of such a great interest rate, you will make up to €1.500 each year by investing €10.000, and later on, you will even start to receive compound interests, which will make that amount even bigger. That’s way more then you get by having the money in your bank account, or investing those in most stocks.

One of the other advantages you get by investing in crowdlending is that you know the interest rate and therefore your profit even before you invest in loans. It is not like stocks or real estate, where you do not know your exact profit before investing.

With crowdlending, you pick the loans you want yourself, and before you pick them, you will be able to see the interest rate in the different loans.

By that reason, you will be able to pick the loans with the highest return (and highest risk) or on the other hand pick the loans with medium risk and medium return. That’s one of the things I really like about crowdlending. Knowing my own interest before even investing is just fantastic.

Why do borrowers use crowdlending?

You may ask yourself right now, why borrowers use crowdlending to loan money instead of banks because the interest rate through crowdlending must be higher.

I know it sounds weird, but most often that is not true. Sometimes is the interest rate through crowdlending cheaper for the borrower than the interest rate in the bank. This is most often the case for individuals as well as small businesses, why crowdlending is a better alternative than to borrow the money in the bank for these groups. This is due to the fact that some banks in the respective countries just overcharge their customers.

At the same time, some of these borrowers and their loans are so high-risk that the banks do not want to take the risk of lending these individuals or businesses money.

Especially after the financial crisis back in 2008, the banks are a lot more conservative when lending money. That means that they do not want the same risk profile as earlier. As a result of that, more individuals and businesses are trying to borrow the money anyway through crowdlending and is, therefore, giving all of us others the opportunity to gain a very high interest rate while we at the same time remove the monopoly of traditional banks.

That being said, crowdlending is not only equal to high risk. There are also many loans through crowdlending, where the risk is lower, and where the borrowers must have been able to borrow the money through a bank. The individual or business have after all chosen P2P Lending because of the lower interest rate as well as the better transparency and the guarantee for no hidden fees through crowdlending.

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