Today I want to talk about P2P quality flags of P2P lending platforms. Also the P2P lending market is not regulated like the stock market, there are several flags every investor is able to use before his investment. Meanwhile there are services like sneakypeer or a ratingboard from Lars who show you those figures on a onepager.
Why should you use things like that?
Well, especially the last year showed that P2P lending is vulnerable. High interest rates at low or no risk is something, which does not work out. Maybe it worked for years, but when in a short period of time Grupeer, Kuetzal and envestio went bankrupt it was s shock for the whole sector. There were some who claimed to have known it before but also a lot of investors who would have liked to have known.
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Treat your investment like it is your own time
What do you do before you spend money on a new TV? Correct, you search for opinions and tests and afterwards for the best price.
What do you do before you buy a new car? Right, you compare several brands and cars with each other and try to find out, which is the best one fitting to your requirements.
What the heck are a lot of investors doing when investing into P2P lending? Yup, they are only checking the highest interest rate.
It is like running with 1.000 EUR into the next store, shouting out loud, throwing the money on the floor and running out with the first best thing to grab. Can you guess how successful this “strategy” is? Probably not successful at all.
From my point of view it is a very good idea to put your money into a specific correlation: TIME! All of you usually know what their salary per hour is. If not, just divide your net income by the hours you are working. This is your value of one hour.
Before starting your investment you should check whether you want to put your time at risk. Is this 16% P2P investment really worth the time of X hours? Do you know what you are investing into? Have you every checked the stats and figures?
Take care of what you are doing and treat your investment with respect. I will show which quality flags you might use to separate the good ones from the bad ones.
#1 Age of the P2P lending platform / company
Especially in P2P lending the age and experiences are huge quality flags. There are tons of new platforms every year, which always try to offer investors the highest interest rate. It is the same with start ups, who try to enter the market of for example e-mobility. Of course they all might have THE ONE product, which will rock the market. But that always mean that all other competitors will not.
Why invest that much money into one single platform, which is absolutely new to the market?
I decided for myself to of course take any chance to invest into the newest hype. But most of money invested into P2P lending is going to Twino, Mintos, Bondora and viainvest. Additionally I took Reinvest24 and Bondster to join this circle of highquality platforms (for me!).
Most of those platforms were founded before 2016 and have experiences of 5+ years. This is pretty “old” for P2P lending, also it is barely nothing compared to Nestlé, Unilever, Coca Cola or McDonalds on the stock market. But this again is the reason why I invested 70% to 80% into diversified ETFs on the stock market and ways less into P2P lending.
My personal P2P quality flags go to: Mintos, Bondora, Twino and Estateguru
#2 Transparancy of P2p quality flags – Help to understand
Over the last years this one changed. Several year back in time no one published annual reports or audited business figures. Meanwhile a lot of platform offer those reports to their investors. Some of them give investors a deepdive into their processes which makes investors understand the business model better.
Transparancy is one of the biggest quality flags during the current time. I guess I can say that P2P lending platforms without any reports or investor relation are more red flags absolutely independet from what interest rates they are offering.
Also platforms like Trustpilot or also Google offer the good possibility to rate a company, you should always take a deeper look. Five out of five stars sound great, but I all of the reviews are faked, it is not even worth a penny. Take a closer look from whom those rating are coming, over which time period and what do they say. One of the worst examples was Ibanwallet, who linked to their profile on Trustpilot, but all the good reviews were from two separate days three years ago.
My personal P2P quality flags: Bondora, Robocash, Mintos and Twino
#3 Auto Invest – Make things easy
As you know I am pretty lazy when it comes to work. I love to work, but I even love things who work automated on their own. Therefore I personally love the auto-invests on any platform. Meanwhile most of the P2P lending platforms offer those auto-invest.
When I started investing it was a great moment to chose which loans I am invested my money into. But over the time the invested money got more as well as the loans. Therefore I changed any investment to auto-invest after three months and never changed back for good reasons.
There is an indicator from Lars & Kolja called ROTI – Return On Time Invested. The more a P2P lending platform automates your work to save time, the higher your ROTI. Therefore I would say: Having an auto-invest and offering investors to chose loans on their features is a quality flag.
My personal P2P quality flags: Any P2P platform offering auto-investments.
#4 Cashdrag – Let your money work
This one is pretty tricky. Every year there are times where some P2P platforms struggle to generate enough new loans. When it happens repaid money is credited to the investors account, but not invested again as there are no new investment opportunities. This is the so called cash drag.
For investors this might be reasonable, but also very annoying as their money is not working for them.
Imagine an investment, where there are 15% interest rate displayed. Out of your 1.000 EUR investment you expect 150 EUR of interest payment at the end of the day. Unfortunately it sums only up to 112 EUR as there is a cashdrag and your investment is not working for you for a period of three months. Your interest rate drops down to 11% and there is nothing you can do about it.
This example is choosen in an easy way, to show you what cashdrag problems might cause for your investment. Depending on how huge this problem is weighted in your personal portfolio, you should take into consideration. The better you chose to receive only 8% over the year than troubling around with cashdrag.
My personal P2P quality flags: Bondora, Robocash, Moncera, Bondster
#5 Overview – Help investors to be in control
Platforms offering a good structured investors cockpit are able to but them into the pilots seat. Also I personally really love automated systems and auto-invests I always want to be in the position to know what is going on. As an investor I do not want to search my account for a special performance indicator or something like that. I want to gain clearity as fast as possible.
There are platforms giving you a lot of insights and others who maybe have something to do. From my personal point of view I absolutely dislike sheet-downloads for any reason except the tax declaration. All the data is usually stored in tables. Depending on what indicators and numbers are most important for investors it should be possible to display with only a few clicks.
Less is sometimes more – but investors should always be able to see they fundamental (correct) data. Additionally it is a huge advantage when there is the possibility to deepdive into specific numbers and figures when needed. Especially on platforms with huge projected loans it is useful to find the data for an own due dilligence.
My personal P2P quality flags: Mintos, Bondora, viainvest, Reinvest24
#6 Planning of passive income streams
As you maybe know I only invest with a focus on my passive income. For me it does not matter, whether the interest payment comes in one sum or in pieces. But I want to know what to expect when. Therefore platforms should be able to show figures about what is expected to come.
Depending on the loans, there is a chance for investors to plan their income. Of course there will be always events like broken buybacks, overdue loans and stuff like that, but usually this does not affect the whole investment.
When I am investing I am always focussing on a specific investment goal – I wrote about it earlier. So in my plans there already exists this number, whereas it is very useful to bench it against the platforms reality. However you name it – cashflow forecast, income overview or interest payments – the more you know, the better you are able to plan.
My personal P2P quality flags: Bondora, Twino, viainvest
#7 Support – What happens, when you ask a question
Sometimes it happens that investors have questions about their account, specific loans or general questions. Also we usually love automated system there is no way platforms could mess a question up in a better way than to link to FAQs. Yes, a library of frequently asked questions is good and absolutely necessary. But if investors have a question there must be some kind of support helping them.
I do not mind whether the support comes from their office in Tallinn or Riga or is a freelancer who is travelling around the world. For investors the most important point is to receive a good and fulfilling answer to their question. Trying to keep it short or link to a source with the solution is absolutely okay. Playing email-ping-pong with someone who is not able to answer the question is horrible.
To be honest meanwhile most P2P platforms have videos, FAQs and a lot of content which helps investors. It looks like this already belongs to the good tone, which I personally really appreciate. Before investing you should maybe check how thick the content library is to get an idea of how the answer to your question might be.
My personal P2P quality flags: Mintos, Bondora, Debitum, Reinvest 24
#8 Diversification among several loan originators
In P2P lending you will find different models. There is for example Bondora, who does not use loan originators. They do not need to because the generate their loans themselves. Bondora ist their own loan originator, what makes it easier on the whole process. Examples like Mintos, Bondster or Debitum are showing that also marketplaces a legit in this area.
You should always check how the platform is earning their income. Additionally for you as an investor it is important to take care about that as your diversification might be at risk. Imagine you are investing amonst five platform, but all of them are using the same three loan originators. Does that sound like diversification? Probably not.
A wide(r) range of sources regarding the loan type (personal loan, business loan, real estate loans, etc.) and also a geographical aspect will help you to diversify your portfolio. Having all of your money invested in the Baltics because of the high interest rates puts your money at risk.
P2P lending platforms offering data about the diversification level they are offering and also how your portfolio does are welcome. Additionally this is a great tool to work on your diversification and optimize it over your whole P2P investment.
My personal P2P quality flags: Bondora, Bondster, Mintos, viainvest
#9 After all: Still 10+% of interest rate
There are eight P2P quality flags until now, which are met by some P2P lending platforms. As this area is pretty young investors might hope that especially very young platforms develop their trustworthiness. And there are examples where it worked out, just like Bondora and Mintos did it over the years. But also Debitum, Reinvest, Robocash and several more are working actively to improve their quality flags.
What makes an investment a good investment?
The answer is simple: Still offering attractive interest rates! I would rather take 8% to 10% from a platform with seven quality flags than 15% from another who was only able to meet two or three flags. It might be legit to add some of those new platforms to your portfolio but as I am focussing on the passive income stream I do not want to include that much risk.
How to use those P2P quality flags for your personal portfolio
People are different – the same way as their investments are different. It is the same with risk. While some people are able to sleep properly while the Bitcoin is running around bet 3k and 60k, others would get a heartattack as soon as their shares drop by 10%.
Investing into P2P lending should fit to your risk-level. Otherwise it is still a high risk investment which is not made for anyone. I highly recommend to think about that before starting to invest.
Maybe not all of my 9 quality flags might fit into your case. Maybe you re not into transparancy or even 10% interest rate. That is totally okay – take, what helps you and forget about the rest. And if you feel like you need 12 quality flags just add another three which are important for you.
I sometimes wished to have such an overview before investing. This is why I made up this list and only want to share it with you. I would be happy if this helped you 🙂