P2P lending as a passive income strategy

P2P lending, a new way of making money?

Though advertised as innovative in many ways, P2P lending platforms are as old as…well SAW III, Kingdom of Heaven, and other awesome 2005 movies. I must admit though, that I was pretty awed by the concept when I first read about it in a couple of blogs talking about passive income streams. You know the type: 3 flashy adsense links, 15 SEO enhanced paragraphs, and click-bait titles…

Anyway, for those of you not familiar with the concept, P2P lending allows you to issue loans to people in return for a small percentage. The number usually advertised on websites varies from 6 to 14%. There are many platforms out there, but the ones I tried were:

These websites are based in Europe and offer short term lending (1 – 3 months), which made them ideal for a quick dry run (contrary to LendingClub).

I decided to invest 2500 euros as a start

All three websites offer buy back guarantees: if a loan defaults, they automatically issue a refund, sometimes with the accrued interest. This was pretty reassuring so I decided to invest 2500€ as follow :

  • 1000 euros on Twino
  • 1000 euros on Viventor
  • 500 euros on Mintos

With an average 10% return on short term loans, I was expecting around 250€ a month. Pretty exciting!

Figure 1: Short term loans available on mintos.com

I spread my investments in small chunks of roughly 33€ per loan. I only chose short term guaranteed loans (1 to 3 months) to spread my default risk and waited patiently for my promised 10% returns.

Here were my returns one month later :

Figure 2: Returns one month later on twino.eu

Not the return I expected…

For every 33€ euros invested in a loan, I got a whooping return of 0.28€ ! If you do the math properly (which I did not do before) that is indeed 10% interest…ANNUALLY! Since the loans I chose matured (terminated) in 1 month, the 10% return advertised is divided by 12, hence the 0.28€. That was a good financial lesson I am not willing to forget.

Worse than all however were the late payment issues. Most of my loans run way over schedule. In total, after investing 2500€, the next month I had around 1300€ back in cash on the accounts. Great…

I was not worried that much because of the buy back guarantee (which according to many statements was pretty much well observed), but still, these delays meant that I was losing opportunity to invest money in other loans.

I let it run for another three months and slowly started to get my principal back, either through buyback garantees or spontaneous repayments. After 5 to 6 months I finally got all my money back plus around 150€ euros…yes that will totally let me quit my job!

I pondered the experience for a while and decided to not continue this endeavour anymore, for a couple of reasons:

  • Too many defaults (30% average in my case)
  • Repayment and buybacks are not reliable. I waited more than 6 months to get all my money back, even though my loans defaulted 4 months before. There is nothing more stressful and dangerous than uncertainty.
  • I believe I can find 10% interest without the incertainty of P2P lending

Share your own experience with P2P lending websites!

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