Thoughts On Peer-To-Peer Lending: My Mintos Experience

Peer-to-peer lending

Disclosure: I am currently not affiliated with Mintos, but I do have an active account there and might become an affiliate in the future.

Today, I’ll share some of my thoughts on the increasingly popular concept of peer-to-peer (P2P) lending. I have invested a share of my own assets in a promising European platform called Mintos.

There’s quite a few things that I wish I had known when I started investing in P2P lending, which I will cover in this article. If you have any questions regarding Mintos or peer-to-peer lending in general, feel free to reach out in the comments.

What is peer-to-peer lending?

Peer-to-peer lending, or crowdlending, is a way for individuals or businesses (lenders) to lend money to other individuals or businesses (borrowers). This is typically done through an online service that matches lenders with borrowers.

In essence, when you invest in peer-to-peer lending you become “the bank” through which the borrower borrows money. You earn the interest that the bank would normally have gotten.

The loans are typically personal loans, business loans, mortgage loans, car loans, agricultural loans, invoice financing or pawnbroking loans, but can be for a variety of purposes.

The intermediary is typically an online service company that has low overhead and can provide the service cheaper than traditional banks with higher costs. Therefore, lenders typically earn (much!) higher interest than they would be able to by saving in the bank.

The interest rates are typically set by the intermediary based on supply and demand, but can also be set by borrowers and lenders themselves in a marketplace.

People with a basic understanding of financial instruments will know that high return rates usually come with high risk. This is also the case for peer-to-peer lending. The lender faces risk in the case of the borrower defaulting on their loans (in which case you lose your money), but also faces risk in the case of bankruptcy of the intermediary (who holds all of your money).

On most platforms, you will be able to spread this risk through diversification and the intermediaries is becoming more sophisticated in e.g. verifying borrower identity and performing credit checks. Typically, you only provide a small fraction of a large number of loans. This ensures that you are well diversified (spread your risk) across many loans. On some platforms you can choose the amount of risk you want to carry (e.g. investing in groups of typically good payers or bad payers).

Which peer-to-peer lending intermediary to choose?

Choosing a peer-to-peer lending intermediary is first of all a matter of geography. Being a European citizen myself, I had to choose between a number of smaller intermediaries since P2P lending is not as mature in the EU as in the UK or United States.

After having sorted out the ones that are unavailable in your country, I would choose the intermediary based on:

  1. Expected returns: Obviously, we are here to make money. I would first and foremost look at the intermediary’s statistics in terms of actual net annualized returns
  2. Size and traction: Make sure that you choose an intermediary of a certain size (based on amount of loans given out) and age with a proven track record. This will increase your chances of finding people to take your loans and minimizing the risk of the intermediary closing down, although you can of course never know for sure
  3. Online reviews: Make sure to investigate other people’s experiences online. Make sure to read as objective reviews as possible (a lot of d-bags write reviews because they are affiliated with an intermediary and you can’t trust them). I often check review aggregators and articles on large trusted media sites
  4. Platform features and experience: Ultimately, the platform features and experience will matter a lot to your overall success. Try to create a user on the platform and try it out. For me, an intermediary must have a sophisticated auto-invest feature, fast withdrawals/support and a secondary marketplace (to make sure you can cash out relatively quickly if need be)

I have only tried Mintos in Europe, but I know of other larger peer-to-peer lending sites that you should check out (I am not affiliated with any of these at the time of writing):

Why I chose Mintos as my peer-to-peer lending intermediary

I ended up choosing Mintos in Europe, because it had a bit more traction than TWINO in terms of size when I started investing in peer-to-peer lending. Also, it had an auto-invest function and the customer support answered some of my questions quite quickly – and it had (and still has) great reviews online:

Mintos review

Another key reason for choosing Mintos was that they accepted lenders from Denmark (where I live), which only a few of the other intermediaries did (the ones in the UK did not).

Mintos has had a relatively steep growth curve since 2015 with roughly 150 million EUR in total funded loans at the time of writing (5 March 2017), although growth has slowed down recently:

Mintos loan details

Mintos is active in a variety of different loans (e.g. mortgage loans, car loans, business loans etc.) and several loan originators from all over Europe (mostly Eastern Europe) are active on the platform:

Mintos type of loans

 

In March 2017, Mintos was accepting investors from the following list of countries that is increasingly expanding (not including the US so far!):

Andorra, Argentina, Australia, Belgium, Bulgaria, China, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Georgia, Germany, Gibraltar, Greece, Hong Kong, Hungary, Iceland, India, Indonesia, Ireland, Israel, Italy, Japan, Kazakhstan, Latvia, Lithuania, Luxembourg, Macedonia, Malaysia, Malta, Mexico, Monaco, Netherlands, New Zealand, Norway, Philippines, Poland, Portugal, Qatar, Romania, Russia, Singapore, Slovakia, Slovenia, South Africa, South Korea, Spain, Sweden, Switzerland, Taiwan, Thailand, Ukraine, United Arab Emirates, United Kingdom and Vietnam.

Let me tell you what my experience with Mintos has been so far:

My experience with peer-to-peer lending through Mintos so far

I started investing with Mintos in November 2016.

I had some issues transferring money, since I had missed some information required on the transfer. It took a brief email exchange with Mintos’ support to figure out the problem – they answered within a couple of hours and I was on my way to eternal peer-to-peer lending glory.

I initially invested 2,000 EUR. I decided to invest a small amount as an experiment that I could follow for a few months before deciding whether to invest more or not. This is the summary of my investment so far:

Investment returns from Mintos

Since November 2016, I have received a net annual return of 10.43% (after write-offs and service charges, but before tax). I believe this is much better than most other investments I have made in stocks – and far better than any bank is willing to offer at the moment!

This being said, I still believe that investing in peer-to-peer lending carries a significant amount of risk. You will see that I am diversified across 219 investments, which is very good. You will see that approx. 85% of my loans are paid on time whereas the remaining borrowers are late with their payments.

I have chosen a risk-averse investment strategy and only invest in loans with a buyback guarantee. This means that if a borrower is more than 60 days late with payments and defaults on a loan, the loan originator (loan companies at Mintos) will buy back the loan including interest from me. Thus, I have no risk from lending money to borrowers… except if the loan originator or Mintos goes bankrupt, which is a very real and plausible risk.

You will never get high returns without taking on higher risk. Period. If anyone tries to tell you that peer-to-peer lending is risk free, do not believe them. It is not. But looking at historical data, many investors have generated good returns and there has not been many cases of bankruptcies… yet.

My investment strategy on Mintos

Generally, I want my investments to require a minimum of effort. The same goes for my peer-to-peer lending investments, so this is how I set up my Mintos investment strategy.

I use the auto-invest feature on the platform and re-invest all of my returns. I rarely change it – and if I do, it is only to include the ever-increasing number of loan originators and countries that is included on the platform.

A word of caution: I would recommend trying out the auto-invest feature with a maximum 25% of your funds in the beginning to make sure that it invests as you want. First, you might risk investing all of your money in loans you had not expected. Second, you want to make sure that your investments are diversified across countries and loan originators – and this is not possible to control if you allocate all of your money to the same auto-invest portfolio initially. I started out investing 25% of my money in Georgia because of this and have now de-selected Georgia from all future investments to become more diversified across countries.

When choosing to invest in peer-to-peer lending on Mintos (and other platforms), you have to consider the following aspects:

Time horizon

The first thing you have to do is decide on your time horizon. This is one of the main areas where peer-to-peer lending differs from stocks. Your money is more illiquid since they are bound to a loan for a certain time period. This means that you can’t cash in quickly if you want to, but you have to wait until the loan duration has finished. Find out when you need the money and how long you are willing to ‘lock them in’ and set your time horizon after that. This being said, Mintos has a secondary marketplace where you can sell your loans to others – sometimes at a premium and sometimes at a discount depending on the loan’s attractiveness.

  • MoneyMow’s time horizon choice: 3 months to 24 months, since I don’t want to bind money in the very short-term loans below 3 months (this makes it harder to remain fully invested at all times) and I want my investments to be relatively liquid within a two-year horizon.

Interest rate

You should find out what the minimum interest rate you are willing to accept is. First, define what you believe is reasonable based on other investments you could make. Then look through the available loans and see whether that is too low or too high. I would not suggest to have a maximum interest rate (why shouldn’t you want a higher interest rate? If it comes at the same level of risk that is).

  • MoneyMow’s interest rate choice: I have set a minimum of 10% which have kept me fully invested through Mintos until now, but of course with a relatively small portfolio

Investment amount

You have to decide how much you want to invest in each loan. The minimum amount is 10 EUR, which will give you the highest degree of diversification, but it might be harder to be fully invested at all times.

  • MoneyMow’s investment amount choice: I have a maximum investment amount of 10 EUR in one loan to ensure a high degree of diversification and I am currently fully invested with a small portfolio of 2,000 EUR

Amortization method

You have to decide on which amortization methods you want. This relates to how the borrower pays back the principal and interest. Choosing “Full” means that the same amount of principal and interest is paid throughout the loan. The other amortization methods have payments of different size and at different point in times during the loan. In essence, this is not really important if the effective interest rate is the same, since you will end up with the same money in the end.

  • MoneyMow’s amortization method choice: I have chosen “Full” amortization because of its simplicity and the ease of calculating my return on an ongoing basis – and I am able to stay fully invested with this anyway.

Buy-back guarantee

This is probably the most important thing to consider on Mintos (and on other platforms). Loans with a buy-back guarantee removes the risk of the borrower defaulting (but obviously not the loan originator defaulting). This means that the loan originator will buy back the loan from you including interest if the borrower defaults – and this is awesome!

  • MoneyMow’s buy-back guarantee choice: I exclusively invest in loans with a buy-back guarantee. I might get a lower interest rate than I could have otherwise, but I totally eliminate the risk of the borrower defaulting – and so far I have managed to get +10% in return only from loans with buy-back guarantee. I see no reason not to choose loans with buy-back guarantee except if you are looking for even higher returns at higher risk.

Loan status

Loan status refers to whether the loan is currently progressing as planned (“current”) or whether the borrower is late with payments.

  • MoneyMow’s loan status choice: I chose “current” since I don’t want to start investing in loans where the borrower is already in trouble

Loan types

You have to decide which loans you want to invest in. Mintos offers agricultural loans, business loans, car loans, invoice financing, mortgage loans, pawnbroking loans and personal loans.

  • MoneyMow’s loan types choice: I have chosen all types of loans that Mintos offers, but I watch my portfolio to ensure it is relatively diversified

LTV: Loan-to-Value

Loan-To-Value is a ratio indicating how large the value of the collateral is compared to the value of the loan. If a loan has an LTV, it is called a secured loan, because the borrower has put something up in collateral. Not all loans have an LTV and mostly car loans do. For example, if the LTV is 50% for a car loan, it means that the loan makes up 50% of the value of the collateral (the car). If the borrower is not able to pay his/her loan, the loan originator will claim the car and get the value that way instead. Therefore, loans with low LTV are considered less risky.

  • MoneyMow’s LTV choice: Since I only invest in loans with buy-back guarantee, I do not care about LTV – or whether the loan is secured or unsecured

Countries

You have to decide which countries you want to invest in loans in. At the moment, Mintos has loans in Bulgaria, Czech Republic, Denmark, Estonia, Georgia, Latvia, Lithuania, Poland and Romania.

  • MoneyMow’s countries choice: I have chosen all countries except Georgia. I initially invested a lot in Georgia by mistake through an auto-invest function, thus I want to diversify a bit

Loan originators

On the Mintos platform, there are 18 loan originators. The loan originators are the companies whose loans you can invest in. The loan originators typically have activities in different countries and focus on different loan types.

  • MoneyMow’s loan originators choice: I have chosen all loan originators except Lendo – same story as with the countries; I initially invested a lot through Lendo and want to diversify

Currency

Recently, Mintos started offering loans in a wide variety of currencies. I have not yet had the time to sit down and understand how the currency conversion takes place and how much you lose through those conversions.

  • MoneyMow’s currencies choice: I only invest in EUR, but I might choose to invest in other currencies at some point in the future

Re-investing

You have to decide whether you want to reinvest your returns or withdraw them continuously.

  • MoneyMow’s re-investing choice: I re-invest all of my returns through auto-investing. This way I make sure to keep my money working for me. Based on your time horizon, you should stop re-investing if you know that you have to withdraw the money at a specific point in time

Existing loans

You should decide whether you want to invest in existing loans. This means taking up a larger share of an existing loan (above 10 EUR which is the minimum). This makes your portfolio less diversified and you might end up with many small parts in only a few loans.

  • MoneyMow’s existing loans choice: I have chosen not to invest in existing loans to ensure diversification

Minimum funds in account

You can decide to have a minimum amount of free funds in the account. People who like to choose some of their own loans manually use this to be able to invest actively in the primary and secondary marketplace (I’ll talk a bit about the secondary marketplace below).

  • MoneyMow’s minimum funds in account choice: I do not have a minimum funds amount, since I would rather have my loans chosen automatically based on my criteria than to spend time on it myself

Summing up: MoneyMow’s peer-to-peer lending investment criteria

My auto-investing criteria on Mintos are summarized in this overview:

Mintos auto-invest

Thoughts on Mintos’ secondary market

Mintos (and other platforms) often offer a secondary market, where you can buy and sell loans directly from other lenders. This becomes handy if you want to cash out earlier than expected and want to sell your loans.

My experience from investing in the secondary market is that you can get some really good loans with high returns there. Sometimes people who have managed to obtain high-interest loans sell them at a small premium to make some quick money. The premium makes effective interest rate (the yield-to-maturity, YTM) slightly lower than the interest on the loan, but it still higher than most of the loans on the platform.

Right now, it is not possible to use auto-investing for the secondary market. Therefore, I recommend using the secondary market if you feel you have the time to wait and search for the good deals – or if you know how to set up a system that automatically scans for good loans and notifies you.

Final words on peer-to-peer lending and Mintos

Thanks a lot for reading until the end – I know it was a long one, but I hope you learned something!

A few words on peer-to-peer lending in general. I believe peer-to-peer lending is a great alternative financial instrument that currently yields great returns. I would strongly advise against putting all of your money in peer-to-peer lending. I have only put a sum of money into Mintos that I am willing to lose. This sum won’t jeopardize my long-term goal of early retirement and financial freedom or wipe my net worth out.

Furthermore, my experience with getting 10%+ returns will most likely not continue in the future. Experience from the larger players in the US or the UK shows that returns fall over time as supply and demand equal out. The supply of lenders is likely to rise on platforms with good returns, thus driving down the price (interest rate) over time. However, I still expect to get reasonable returns in the future above 5-6%, which I still consider good.

[UPDATE: 23 April 2017] Sune from Frinans.dk pointed out that tax can be a return-killer in some countries, since you have to pay tax on the interest (returns) I have quoted above. Depending on your local tax regulation, this is worth investigating! For me, peer-to-peer lending is still a very valid investment compared to stocks since the return is still a bit higher on average and I like the diversification.

A few words on Mintos to summarize my experience. I think Mintos is a great platform, which have given me good returns so far. However, it is the only intermediary I have used, so I am sure that you can find similar good platforms out there.

For me, two major drawbacks of Mintos is 1) the lack of a mobile application and 2) the lack of easily accessible overviews of my loan diversification (countries, loan originators, loan types, interest rates etc.). I hope that they will work on this in the future!

That was the words. If you have any questions for me, please don’t hesitate to get in touch.

What is your experience with peer-to-peer lending? Have you tried Mintos or other platforms?

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6 Comments

  1. Hi Carl,

    Great blog – enjoy reading your updates.

    Question (from a Danish citizen): If you use the auto-reinvest function, are you still taxed, even if you don’t withdraw the gain to your bank account, or will you only be taxed when you eventually decide to transfer to your bank account? Does “lagerbeskatning” play a role in crowdlending?

    Thank you, and look forward to reading more posts from you.

    Niels.

    1. Hi Niels,

      Great to hear from a fellow Dane! 🙂

      Regarding the auto-reinvest function, I have been in touch with the tax authorities a few times. I expect to receive a new reply in the coming weeks (good thing you reminded me to push for a reply!). What they have told me so far, is that crowdfunding/peer-to-peer lending is considered normal loans. To be safe, and until they have further clarity on the subject, they advise us to report it as foreign income (only the interest of course) while also reporting the amount owed by foreign debitors by each year end. This is of course the least desired from an investment point of view.

      To my knowledge, “lagerbeskatning” does not play any role in crowdfunding, but only in stocks. However, you could consider it the same principle if you have to pay tax on auto-reinvested interest before you have a chance to realize it and withdraw it to your account.

      I’ll get back to you when I know more 🙂

      I am very happy to have you following – and please don’t hesitate to reach out in the future.

      Onwards,
      Carl

  2. Interesting read. I’m very much looking forward to seeing how you will fare. What are your thoughts on starting out with investing through peer-to-peer lending as opposed to maximising your investments in stocks? I’m specifically thinking about taxes. In Denmark you will be taxed 27% on the first 50.000 when it comes to stocks but much more aggressively when it comes to capital, which moneylending is.

    1. Very good point indeed! Tax is definitely a return-killer and could make it a bad investment compared to other asset classes. Depending on where you live, people should watch out for local tax regulations – I’ll add a short section about that in the post. I think there’s two main reasons for why it could still be a good investment for me:

      1. Without going into too many details of the Danish tax system, I would be taxed roughly 30-something % since I also pay interest on a housing loan which comes as a tax deduction. With returns of 10.5% from peer-to-peer lending, the return after tax would still be higher than the long-term US stock return after tax on say 6% (now I’m relying on my memory for this return number and not an actual source :-))

      2. Diversifying investments is never a bad idea (although some of the negative effects impacting stocks also impact loan takers/givers)

      Keep up the good work on your blog – very interesting analyses!

      Onwards,
      Carl

      1. 1. So you could actually say that investing in products where you are taxed on capital gains are more/extra relevant if you have a housing loan… that’s interesting, I didn’t know that. Perhaps you should check out this then: https://www.brickshare.dk

        2. Diversifying is always a good thing!

        /Frinans

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