Crowdlending is a risky investment
Like other investment forms, crowdlending come with associated risks. This post will introduce you with several classical investing mistakes that beginner and even advanced investors may make.
Basically, it boils down to being patient, diversifying your portfolio, being on the lookout for red flags, and having realistic performance expectations – don’t let greed cloud your judgment ! -.
Like the remaining of this website, most of this post is based on my own experience. In spite of investing in loans for several years, I lost money due to poor investing choices, and felt for several scams.
Investing mistake #1 : investing money you need
Always consider your future financial needs before investing. Many P2P lending companies provide a secondary market The secondary market is a marketplace allowing investors to sell loans from their portfolio to other investors. This is useful if they need to get their money back before the loan’s maturity., but you’ll usually have to sell your loans for a discount, thus losing money. Worse, if this feature isn’t available, your money will be stuck for a long time.
Also, what if things go wrong ? Crowdlending – especially in the Baltics – is mostly an unregulated area. Regulation is expected to take shape at the end of this year. However, for now, there’s little or no supervision of platforms, which leads to an increased risk. Moreover, the higher returns (compared to most over investments) also inherently lead to higher risks !
As I’m updating this article again in April 2021, several platforms turned out to be scams. Kuetzal, Envestio, Monethera, Wisefund and Grupeer were the most high-profile, not to mention smaller platforms such as Iban Wallet. I hope to recover part of my investments through the various lawsuits; however, even if I write them off entirely, I still managed to end up in the green. Unfortunately, this isn’t the case for everyone. I’ve read several heart-breaking stories from Envestio investors on Telegram channels; one of them lost the equivalent of 6 or 7 years of savings, which was supposed to be the down payment for his future house ! Don’t be like him, and don’t invest money that’s critical to your future.
Finally, as the Covid-19 outbreak has proven, unexpected crises may happen at any time. They may lead to delayed repayments at best, borrowers defaults at worst.
Investing mistake #2 : investing too much in loans
As pointed out in the previous paragraph, investing in loans is risky – even in presence of a reassuring buyback guarantee A buyback guarantee is a guarantee provided by the platform or a loan originator. If repayment of a loan is delayed by more than a given delay (usually 30 or 60 days), the platform or loan originator will buy back the loan. The guarantee may cover only part of the capital, or in a much more interesting case, both the capital and accrued interests. As the conditions vary from one platform to another, it’s very important to check this point. -.
As a rule of thumb, I’d advise not to invest more than 10% of your assets in loans – make it 20% if you feel especially brave, or at the contrary if you invest only in conservative loans through highly reputable platforms. While this figure may seem small, it’s really important to always keep the risk factors in mind. What if there’s a large recession and most borrowers can’t reimburse ? Probably even worse, what if a platform goes bankrupt ?
I personally have less than 10% of my assets invested in loans. Most of the remaining is invested in real-estate, under various forms – I actually have too much invested in real-estate, and not enough in stock-exchange, but that’s another topic –
Investing mistake #3 : investing too much, too early or in a single loan
Don’t be in a hurry ! Even with reputable crowdlending platforms, I always start investing with a small amount. It takes time to get used to most websites; you don’t want to improperly invest your money because of a mistake in auto-invest configuration ! So, start small, and take time to get to know the platform. Once the returns satisfy you, gradually increase your investments.
Moreover, investing a lot of money in a short time makes it much harder to spread your capital between many loans, which will hurt your portfolio’s diversification.
When it comes to personal loans, I invest €20 max per loan; for business or real-estate loans, I usually stick to the platform’s minimal investment amount.
I unfortunately broke this rule when investing at Envestio, because the platform had a small number of projects – and to be frank, I was blinded by the high returns -. I ended up paying the price, as I lost around 10% of my portfolio when the platform proved to be a scam. Lesson learned : from now on, I will strictly follow these guidelines.
Investing mistake #4 : investing too much in speculative loans
During summer 2019, one reader asked in the comments if I considered investing in Envestio as risky. My answer was clear (and is obviously valid for other platforms) : These investments are always risky (you don’t get 15%-20% annually without risk !). In hindsight, it’s obviously painful to re-read this; I should have valued my own opinion much more.
Before the Envestio and Kuetzal events, speculative loans (which I arbitrarily define as yielding more than 15% annually) used to make up around 25% of my loans portfolio. I was comfortable with this figure, as I didn’t take the risk of scam very seriously – how silly of me -. Now things have changed dramatically, and I greatly rebalanced my portfolio towards more conservative platforms.
Think about it : even when investing in peer-to-peer loans from reliable loan originators on reputable platforms such as Robocash or Moncera, it’s possible to get yearly returns of 10% or more. On the other hand, how much does your bank give you on your saving accounts ? Chances are it’s much, much less than this figure. So, why take risks when even rather conservative P2P investments can beat your bank ?
Investing mistake #5 : investing too much in a single platform
It’s important not to put all your financial eggs in the same basket ! Until the Baltics P2P landscape gets regulated, investing too much on a single platform will put your investments at risk.
No matter if you want to invest in secured on unsecured loans, for a short or a long duration, in individual or business loans; there will always be several companies offering great investment opportunities. Signing up is usually very easy, so splitting your investment between several companies is a no-brainer.
As an indication, my maximum allocation in a single platform is around 15%. My current Omaraha allocation is well above this threshold for historical reasons, but I withdraw money every month in order to decrease my portfolio’s size.
On the other hand, investing through too many platforms will likely prove to be counter-productive. First, it will take you longer to manage your investments. More importantly, you’re more likely to invest your hard-earned money in an unreliable platform !
Investing mistake #6 : not considering the reliability of loan originators
For peer-to-peer loans, it’s important to consider the financial solidity of loan originators; indeed, some of them are very small firms with rather awful financials. Should they go bankrupt (as many lending companies on Mintos already did), you’re likely to lose a large part of the invested funds !
To give you a concrete example, there are currently 60+ originators present on Mintos. As of August 2021, I invest only in 4 of them : Iute, Wowwo, Eleving Group (the new name of Mogo) and ESTO. In addition, instead of using Mintos for them, I invest in two additional lending companies directly on a dedicated platform : Moncera for Placet Group loans, and Lendermarket for CreditStar loans.
Investing mistake #7 : ignoring red flags
Remember how I broke my guideline #3 – not investing too much in a single loan – ? Well, I’m also guilty of ignoring the rule #8 : taking red flags seriously. Indeed, although Fast Invest was sometimes considered as a Ponzi scheme, I ignored these critics as my investing experience there was overall very positive. All loans were repaid on time, and withdrawals were processed very quickly. However, that’s exactly how I would describe my experience with Envestio until the platform disappeared !
We can’t afford to ignore red flags anymore – especially now that they’re well-documented, instead of being just rumors -. As a result, I’ve decided to blacklist several platforms. Do yourself a favor and treat red flags seriously; when investing, the safety of our capital should be our main concern.
Investing mistake #8 : viewing P2P lending as a totally passive investment
Peer-to-peer loans are sometimes described as way to get a passive income. It may be true for Mintos’ Strategies or Bondora Go & Grow, as your portfolio is entirely managed by the platform. However, nearly all other investments will require you to spend some time managing your portfolio.
For example, using auto-invest means you won’t have to pick up loans manually. However, interest rates on most platforms usually vary throughout the year. It will thus be necessary to check them regularly; failure to do so may lead to sub-optimal returns (if actual interest rates increase) or idle funds (if interest rates decrease below your settings and the auto-invest stops reinvesting).
Moreover, when investing in P2P loans, I strongly advise investors to double-check the loan originators rating regularly, in order to remove risky ones.
Finally, for business or real-estate loans, investing manually may be the only option available. Even when it’s possible to invest automatically, it may not be the wisest course of action; reviewing the projects descriptions before committing your funds will usually be safer.
Investing mistake #9 : not keeping informed of current events
This is kind of an extension of mistake #9. It’s a fact that most platforms are slow to react to events, whereas news travel fast on internet.
Although there’s still some too much noise compared to the actual amount of information, Telegram channels are usually a great way to keep informed about current P2P events. Granted, most channels still have a few trolls around – not to mention the numerous scam attempts in DM -. However, it’s overall a huge improvement over Facebook groups, thanks to an efficient moderation.
Nearly all platforms now have a dedicated channel. In some cases, it was setup by the platform itself (like for Moncera or Robocash). Representatives from other platforms such as PeerBerry, Lendermarket or BulkEstate also answer questions daily in the relevant channels.
Keeping informed is especially important for Mintos investors. Indeed, most bad news regarding originators usually surface on Telegram 2 or 3 days before the lending company gets suspended on the marketplace. This leaves more than enough time for informed investors to dump their loans on the secondary market.
If you’re not inclined to subscribe to many different channels, Kristaps Mors’s new website provides a curated summary of interesting news.
Additional recommended reading
Several platforms published blog posts on diversification. Among them, a recent blog post on Mintos lists several diversification guidelines.