The current market situation, with prices going down and experts talking about us being in a recession, will be uncharted territory for many investors. The last time an extended down phase hit was in 2008, during the global financial crisis.
That was almost 15 years ago, and so many things have changed. New investors have come into the market, and new asset classes emerged, such P2P loans that were previously unheard of.
With that in mind, this article will discuss why P2P loans can be an excellent addition to your portfolio during a crisis and how you can benefit from them.
Characteristics of P2P Loans
Our blog has many in-depth articles on P2P Lending, discussing what makes it unique and how you can use it to your advantage. Let’s summarize the most significant points in this article, but feel free to delve deeper via the linked article.
P2P loans offer stable return rates
Most of the time, when you invest in P2P loans, you invest in loans with a fixed return rate. Therefore, you always know your expected returns – similar to bonds
Different types of loans are available
P2P lending allows you to invest in a variety of different loan types. With Lendermarket, this means consumer loans from a variety of European countries, along with real estate-backed business loans. You can decide where you want to invest, allowing you to diversify easily.
No stocks, yet flexible
With P2P Lending, you invest in a loan, so there are fixed terms like the return rate or the loan duration. This contrasts with stocks, where you buy a share, and its value may go up or down. That also means reduced flexibility when you wish to get out of the loan before its due date, but there is a way to solve that with secondary markets.
P2P Loans Offer Stability and a Fixed Income
As mentioned earlier, with P2P loans you know what you get. You know what you invest, how long the money will be bound, and what the return rate for that loan will be. Most loans offered on P2P platforms, such as Lendermarket, have already been issued by the loan originator to the borrower.
On Lendermarket, the loan originators offer a ‘Buyback Guarantee’, which means that even if the borrower defaults, you still get back your initial payment (plus any outstanding interest).
Due to this approach, you can determine how much money will likely be distributed monthly because return rates are fixed. This offers stability for your portfolio, which assets like crypto or stocks cannot offer.
No Volatile Market Movements
The nature of P2P loans is such that the parameters for your investment are determined before you decide to invest. You know how long the loan has left until its due date and at what rate the interest is being declared and ultimately distributed.
This contrasts with stocks, where you buy a share but do not know whether the price will rise or drop. Some stocks also offer dividends, but the distributions depend on the share price.
With stocks, your portfolio can increase 10% in one month but just as well drop by the same amount in the next – the current situation shows that these drops are possible.
On the other hand, P2P loans are stable. No matter how the stock market reacts, the terms for the loan stay the same and remain unaffected by market volatility.
Peer to Peer Lending Helps With Diversification
P2P loans are diverse. There’s not just one type of loan to invest in, but rather a variety of different options available. These include:
- Consumer loans which are divided up by different countries, so you can pick the ones that fit your specifications the best.
- Real estate-backed loans which are issued to businesses or individuals, meaning they offer an appealing way to invest in real estate without buying a house.
- Business and commercial loans
Ultimately, it’s up to you to decide which of these loans fits your investment strategy the best, in terms of risk, returns, and duration. To help clarify this further, here is some more information on the types of loans currently available through Lendermarket:
As the name suggests, these are loans that are issued to consumers. Individuals go to a loan originator, like the Creditstar Group, and apply for a loan. After going through the application process, the loan might be issued and offered on our platform.
You can then pick which loans to invest in, sorted by country, interest rate and remaining term.
Real estate-backed loans
On Lendermarket, loan originators also offer real estate-backed business loans. Businesses apply for a loan, for example at Credory, and then provide their real estate as collateral for the loan. While consumer loans are usually unsecured, these are secured loans. Also, the loan volume is higher than with consumer loans.
Flexible If You Need Access to Your Funds
Although P2P loans are a relatively fixed investment, where the duration of your loan is known upfront and your money is tied up until the loan matures, there is leeway. To allow investors to get out of loans before the due date, P2P platforms often offer a secondary market.
You can sell your ‘share’ in the loan to other investors in that market. This could be attractive to the buyers because you might sell it cheaper than it was initially priced, or the loans you sell may offer a higher interest rate than what’s currently available.
Through this process, the market has additional liquidity, making P2P loans flexible.
When markets go on a rollercoaster ride, it can also affect your portfolio, especially when you have a high allocation of stocks or crypto. In contrast, P2P loans act more like a solid rock, where you know upfront what to expect.
The returns don’t rise high and drop low due to market volatility, but instead, you have a fixed interest rate that is paid month by month.