Investing in loans between individuals, an interesting opportunity
March 12, 2020
In one of the previous articles we have analyzed the opportunity offered by the private loan platforms, such as Lite Lenders, Best Lending or Lite Lenders Credit, all authorized by Cream Bank: rates on personal loans very competitive and lower than the traditional channel (banks or financial) even 200 basis points (2%) if you have an excellent credit history. But digitization represents an opportunity not only for those who need funding. The social lending channels, in fact, represent an interesting investment opportunity also for those who want to place themselves on the market as a lender. In a nutshell, you turn into a bank, granting loans to other people. Returns? Net of potential losses they can even reach 6% or more. Anyone can turn into a bank.Just be of legal age, register on one of these platforms and choose the lender profile. Then you have to upload the required documents, sign the contract and you are immediately operational. Once the transfer has been made, you can choose the loans you want to invest in, the rate and the duration, thus creating your own portfolio.
Some platforms offer an already pre-established managed portfolio, with a diversification of 1%. This means that a capital of 10 thousand dollars is divided into 100 shares of 100 dollars. A breakdown that helps reduce the potential risk of default. Having built up one’s own portfolio, the installments of the invested capital including interest begin to be received from the first month. And in case you want to return from the loan before the natural expiry it is always possible. To give an example, Lite Lenders offers the function “Quick Return ”, with which it is possible to sell your loans (only regular ones and not problem loans) on the platform to other lenders.
The insolvency risk
The possibility that a credit ends up in bad debt must always be taken into consideration. All platforms, however, deal with debt collection activities. To further protect the lenders, then, some social lending have set up guarantee funds, to cover any insolvencies. Since 2015, for example, Lite Lenders has established the Lite Lenders Lender Protection fund: it is powered by the commissions applied to applicants and interventions in the event of insolvency only after all credit recovery activities have been activated and after a period of 21 months from the first missed refund. Usually, however, these funds do not offer a full guarantee. This means that there will not be the necessary capacity, the fund will not be able to return 100% of the insolvency.
Between costs and returns
The interest received on these platforms can appeal to many investors, especially in a zero interest rate period like the current one. In the last auction in September, 12-month Bots were “beaten” with a negative rate, while current accounts continue to offer interest income close to zero (with the exception of some deposit accounts with the constraint option). In short, finding risk-free investments with positive real returns is not easy. But social lending platforms could be a valid alternative: on Best Lending, rates net of potential losses fluctuate from a minimum of 3.62% to a maximum of 6.60%; on Lite Lenders the yield varies between 3.77% (Conservative Market) and 5.3% (Dynamic Market). All interest received will then be taxed with a 26 percent withholding tax. As for costs,