In these past years, we’ve had 0% interest rates for a long time. Bonds were yielding 0%, equities too expensive, and real estate was expensive almost everywhere.

That means we had to search for some forms of returns somewhere, “The Search for Yield”. Result: Bubbles everywhere.

P2P supposedly provided some return and diversification in this environment. Does it make sense to invest today when bonds already provide yield? My honest opinion: No, except maybe P2P to real estate. I think there are better investments.

Understanding P2P Lending

First, what is P2P lending? Peer-to-peer (P2P) lending, also known as crowd lending or social lending, is a method of borrowing and lending money that directly connects individuals or businesses looking for loans (borrowers) with individuals or institutions willing to lend money (investors or lenders).

This type of lending typically occurs through online platforms that facilitate the matchmaking process and oversee the loan transactions.

So, basically, instead of lending to the bank and the bank deciding where to invest, you can decide directly where to invest or let the platform auto-invest following some predetermined strategy.

My P2P Lending Experience

In 2020, I tested three P2P platforms by investing a small amount in them to see how they perform—just enough to understand how they work and see if they match my investor profile.

Well, three years later, I can say I am not totally convinced. The test gave me good insights though. I invested in three well-known platforms available for Europeans—Mintos, PeerBerry, and EstateGuru.

Not all P2P are created equal. They offer different services and exposure to different types of lending. Mintos and PeerBerry offer consumer lending, while Estate Guru offers real estate funding directly or bridge loans for real estate projects.

Assessing P2P Platform Performance

After three years, I can say the results were bad for Mintos and PeerBerry and okay for Estate Guru. Mintos and PeerBerry claim returns over 8% during my investing period, but then, a decent part is considered “war-affected loans” or some kind of complex classification to not label it as default. The fact is that returns were negative if I take into account these events.

It’s very hard to compute total returns, and overall, I find the information very hard to understand. I had to go to statements and calculate the money that I’ve transferred in and out. They have complex buyback warranties, but somehow everything is too complex. You can tell me that this specific example is a one-time event, but one-time events happen all the time.

Just waiting for another black swan around the corner. It’s about how robust we are.

For Estate Guru, results are still negative as there are loans in default, but I’ve found that most of the time the principal is returned as there is usually some assets to pursue, liquidate, etc. This process usually takes a long time (over 1 year sometimes). So, I still expect to get around 8% overall, not great, not bad.

Challenges and Complexities of P2P Lending

I’ve found that liquidity is very, very low in all P2P platforms even if you’re using a “short-term” strategy for the platform. That means that it would take a long time to withdraw your investment. There are a lot of complexities to P2P lending. It’s not as passive as P2P platforms would like you to believe.

It starts whether you’re from the USA, Europe, or other parts of the world. Platforms that are available for Americans are not available to Europeans, etc.

Then it takes a lot of time to study P2P lending. In P2P, you need to look at the platform which is managing your money, the same as a bank or broker for stocks. But in P2P, you must study their financial stability, reputation, as well as what strategy, what type of loans they offer, and how good their historical record is. On top of it, you must trust that information, as no one is really confirming the information.

Since they’re not regulated at all (some are audited, some are publicly listed – it’s worth what it’s worth after what we saw with FTX), you have to understand where they are, who is managing them, what they do, what sort of products they offer, buyback warranties, etc. There are sites that review them like https://p2pempire.com/en/review.

If you would like to invest in many, you would have to invest quite a considerable amount of time to understand them. You can decide to let the platform auto-invest following some automated strategy that they offer, you can define your strategy, or you can chose individually what to invest. This will be, of course, much more time-consuming. You can also diversify as much as you can by defining very small loan amounts.

Considering Real Estate in P2P Lending

I have to say that if I use P2P lending again in the future it would be related to real estate. Why? Because usually the size of the investment allows for more time dedicated to the analysis of the project and you can define the LTV (loan to value), so you can manage risk more easily and precisely.

Comparing it to consumer loans it is easier to transform the collateral into cash in case of default. Just imagine, for example, recovering a cell phone, selling, etc., compared to a house.

I also think that P2P lending to small businesses is somehow riskier, and the business model has big flaws. It’s much easier to access the value to be recovered in a house than in a business.

In a business you must analyse the tangible assets and imagine if they’re worth their book value in case of default, as well as seniority on creditors, etc. And that is assuming that the assets are still there in the event of default…

Businesses are different and complex sometimes. As you’re doing a small loan, you cannot dedicate much time to the analysis of a business or other variables – otherwise, the loan will not be profitable after you deduct the fees for analysing the business, etc.

It’s not 100x more time-consuming to analyse a 10M business vs 100K one. Maybe with the use of AI and statistical models, you can automate and mitigate part of the risk, but I guess it would be hard to be competitive.

In P2P lending to Real Estate the analysts of the P2P lending platform can invest more time analysing the project and the probability of default, and it is a simpler and more standard analysis. You can also consider personally looking at the project individually.

There is usually much more information regarding specific projects in real estate than consumer loans or other types.

So you can treat as investing in an individual piece of Real Estate. However, you still have the risk of the platform to take into account.

Overall Perspective on P2P Lending

Overall, I don’t think P2P lending is yet a great investment: too much risk, too much work. I don’t think the yields that these platforms offer are enough to compensate for the risks when compared with the current risk-free investments available. Maybe in the past it would be enough but the current spread to the Risk free is not enough right now.

For real estate, I personally prefer REITs (Real Estate Investment Trusts) if I would like to expose myself to real estate, whether residential, hotels, malls, telco towers, etc. REITs trade like an ETF or a stock, so you have immediate liquidity. They also can lose or appreciate value like a stock.

That’s where maybe you can diversify through some P2P lending, which theoretically does not fluctuate as long as the borrower doesn’t default. You will get some exposure to real estate with smaller amounts than buying an entire property and managing it. See buy a house.

 You have other advantages as well as disadvantages for REITs. I would address REITs in another post.

If you have a good experience with some P2P real estate lending platforms send me a message. Thanks

Financial Disclaimer and Conclusion

If you have a good experience with some P2P lending, please tell me something. If you would like this post, consider subscribing to the newsletter. Financial Disclaimer: The information provided here is for educational and informational purposes only and should not be considered as financial advice. Investing in financial markets involves risk, and individuals should carefully consider their own financial situation and consult with a qualified financial advisor before making any investment decisions. The content provided does not guarantee any specific outcomes or returns. We do not assume any responsibility for actions taken based on the information provided. Always conduct thorough research and due diligence before making financial choices. Always conduct thorough research and due diligence before making financial choices.