One year in P2P lending

I started slowly investing to P2P lending approximately one year ago (in March 2017). I decided to sit down and have a look at how it is looking, what I learned and if I want to continue this kind of investment in the future.

During the first year (March 2017 – March 2018), I received ~€42 in interest from P2P lending. The question is – what ROI (return on income) does it resolve to?

It is easy to calculate annual returns with stock investments, as you usually invest the whole amount once (at least in my case as I don’t add to my existing positions). However, it is quite tricky to calculate returns from P2P income, as I usually add some funds to the account monthly. I did some research and came up with a really useful and interesting website about P2P lending – Lend Academy. I found out that XIRR() function in Excel is the most accurate way to calculate returns from investments like this. You may read more about this approach in this article of Lend Academy.

I checked history of my deposits during the last year and below table represents returns based on XIRR formula in Excel.

Almost 11% looks really well and I am happy with such returns. However, one year is a very short period and the economy was going upwards. I am pretty sure that it would look differently if we hit some recession. Time will tell how it will look when the economy goes south. Also, the returns are usually bigger at the beginning and tend to slow down when some of the loans default.

During this short experience with P2P lending, I still could observe some pros and cons of this investment form.

Pros:

  1. Pretty high returns, compared to other investment forms;
  2. Low investment needed (€5 minimum investment in my platform). Returned investments may be easily re-invested to new loans;
  3. Easy to setup (account setup is really simple and doesn’t require you to visit a bank etc);
  4. Auto-investment. You may set up auto-investment for your defined criteria (lender’s credit rating, purpose of loan, maturity length, amount of loan etc);
  5. Constant cash-flow. It’s especially useful to get monthly income when you are thinking about financial independence;
  6. You only need to pay income tax if the interest from P2P lending exceeds €500/year in Lithuania. For now, I am far from this number, so I am enjoying 0% tax rate.

Cons:

  1. Low liquidity. Secondary market is not very active so it might be hard to sell your investment if you need to get your investments back urgently. I have some loans that have maturity of 60 months (e.g. some of my loans will be fully paid back in March 2023);
  2. Risk of loans to default. There is an inevitable chance that some of the loans will default and will not be paid back. At least for now, I am investing to the most risky loans with insurance (and lower return) but other platforms don’t offer this option and I have a suspicion that the platform I use may cancel this feature as well in the future;
  3. Not clear regulations. There is always a risk that some regulations of P2P lending will change in the future. Also, it is not very clear what would happen if the company which is providing the platform for lending would go bankrupt.

 

To conclude, I am happy to have found this form of investment and am planning to keep investing to it ~10% of my investments portfolio.

 

Are you investing to P2P lending? What are your thoughts? Do you have any suggestions to me? I would appreciate your comments, as always!

3 thoughts on “One year in P2P lending

  1. Hi, BI. You probably know my opinion on P2P lending. I think its too risky. As you mentioned is ok when economy goes up, but I can bet that 80-90% of these platforms will go bust when things will go south. Well everyone predicts next correction/recession on 2020 so you have nice 2y. You have to exit before things goes bad, because all that you earn most probably reinvest (casino theory on investment) all in all you will probably lose money in the end and will be wasted money, time, energy and nerves 🙂 So im sticking away from crypto, P2P and all other new hype financial pyramid style structures. People were doing since stone age probably – chasing for to be rich fast. 99% of become rich fast schemes are in the end are either scams of financial pyramid structures.

    1. Hi P2035,
      Thanks for the opinion and yes, I knew it already! 🙂 We will see how it will go. I am sticking to investing only 10% of my portfolio to P2P, so it wouldn’t be the end of the world. I hope that it will still be profitable in the long run, even if some of the loans default. Time will tell 🙂

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