For a long time it seemed to be the future, but more and more fractions are arising in the market for peer-to-peer lending. Peer-to-peer lending means that investors can lend their money directly to a private person, so without intervention of banks. Mostly, an amount of the principal and the interest will be paid off monthly. An example of peer-to-peer lending: if somebody wants to borrow €100,- ten people can lend him €10,- to reduce their risk. This seems like crowdfunding, but there is a small difference. With peer-to-peer lending, the money will be lend to the person or company. With crowdfunding, the investor will most of the time receive a share of the company or order.
In the Netherlands, there are not many of them yet, but in Europe there are a lot of large platforms. Remarkable, a lot of these platforms originally came from the Baltic states. In many countries there is only limited regulation, because it is a new market.
For investors, there is always a risk that the borrower might not be able to repay the principal. On several platforms, loan originators are originating loans with a relatively high interest rate. Investors can take over (a part of these) loans, while receiving a slightly lower interest rate. Some loan originators offer a buy-back guarantee. This means that they will repay the loan to the investors if a borrower does not repay in time. This is a way to reduce the risk for the investors. However, there are still some other risks: the loan originator may go bankrupt whereby the buy-back guarantee becomes worthless. In the worst case, the platform goes bankrupt, causing the investor to lose all of his investments. To reduce this risk, there are different independent parties which judge the loan originators and platforms on their creditworthiness.
A large P2P-platform is Mintos. On the platform, €5.158.729.887,- is invested by investors from 66 different countries. On Mintos, there is a primary market and a secondary market. On the primary market, people can invest in loans offered by loan originators. If the investor does not want to wait until maturity, he could offer the loan on the secondary market where other people may take over the loan. At the moment, a lot of loans are offered on the secondary market with large discounts because investors fear that many loans will no longer be repaid due to the coronavirus. Some investors take advantage of this situation. But this means that there are smaller amounts invested on the primary market, which may lead to a smaller liquidity of the loan originators. To attract investors, the interest rates on the primary market have risen. Mintos has introduced a measure: from April, a fee of 0.85% must be paid for selling loans on the secondary market. Because of this, it becomes less attractive to sell loans. ID Finance and IDF Eurasia are loan originators which are mainly active in Spain and Kazakhstan. In a statement on Mintos, they told that the payment schedules of borrowers will be extended. Therefore, this will have an impact on investors. But the say that the investors will receive interest according to the original schedule. The question is whether these measures and statements will be enough for investor’s trust.
Recently, different lending platforms went offline. Kuetzal and Envestio were quite big platforms, now there are suspected of fraud. There are also similar rumours about the platform Grupeer, but they deny it. Grupeer claims that they cannot fulfil their obligations because of several reasons. For example, there are many countries where the payment terms are prolonged due to the corona virus. Besides, possibilities of debt recovery are limited in a lot of countries. In addition, too many borrowers can not meet their liabilities anymore. All of this might lead to something like a ‘bank run’ on other platforms, causing the P2P market into problems.
By: Kelly Veldman