Well, crowdlending is basically the democratization of financing loans to companies or private persons. It gives individuals the opportunity to invest in a wide range of loans. A world, which previously had very high barriers unless you could provide a large start-up amount for your investments – often thousands of Euros.
On the new investment platforms, you can start with amounts as low as € 10 and earn passive income from day one.
What are the benefits?
- High returns – often up to 13%
- Simple investments
- No capital barriers
- Due to buyback guarantees, these kinds of loans are relatively safe
- The cash flow is rather predictable and regular on a monthly basis
Types of investments?
- Business loans
- Development projects
- Real estate loans
- Personal loans
It is also known as peer-to-peer lending, or P2P in short terms. It has been made possible due to a few different factors: The rise of the Internet and with that we have seen the development of fintech services as www-based money transfer platforms and now crowdlending platforms.
The history behind crowdlending
Before the global economic crises that emerged a decade ago, the banks were eager to finance almost all projects, business loans, mortgage loans, personal loans and so on. There were hardly any hurdles to pass before your loan application had been approved.
Since then a lot has happened. The banks have cut down on loan opportunities and several companies in various businesses have found it hard to finance their investments in building projects, new machinery, etc.
New possibilities emerge
As an alternative to the established financial system, the companies that need an investment financed can approach a loan originator that requests financing on a crowdlending platform.
The originator exercises all documentation, risk assessments and collects all necessary information in general. Once the loan has been approved it will be published on the platform and now you can invest your money in this specific project.
How does the term “democratization” fit into this picture? As mentioned financing development and business projects previously had high initial capital requirements.
Now all individuals can invest in various projects. The loans are financed by hundreds or thousands of people who invest their money in a specific loan. An investment that earns them a passive income.
Who is involved?
As you can see from the below figure four stakeholders are involved in the financial process:
The lender (that is you), the crowdlending platform (could be Grupeer), the loan originator (SIA Primo Invest and the borrower (the Norwegian contractor).
How does it work?
Let us have a look at this example from the crowdlending platform Grupeer. It concerns a development project in the city of Buvika, Norway and the interest rate is 13%:
The loan originator, the Latvian company SIA Primo Invest, issues the loan to a Norwegian company, and this loan partly finances the building project. This specific loan is worth € 10.000 and the initial loan offer is € 9.500. The interest rate is 13% and the loan is terminated after 11 months and 7 days.
This investment project was a very popular investment and as you can see from the screenshot it is sold out – available: € 0.00
As you might have noticed the loan says € 10.000 but the initial offer is only 9.500. The reason for this is the loan originator keeps a 5% part, which means the remaining 95% of the loan will be financed by the crowd – that is you and I.
Grupeer uses this to make sure the originator has a stake in the project which encourages SIA Primo Invest to only originate profitable quality loans. Will this prevent the borrower or the originator from going bankrupt and lead to the loss of your investment?
No, but Grupeer, the lender and the originator runs a risk in every investment. All involved have an interest in keeping this as low as possible combined with the highest possible yield. Hence, a thorough risk assessment will be achieved by the originator, which excluded the riskiest loaners from gaining access to the lenders’ money.
Furthermore, the loans have a buyback guarantee. This means the originator will buy back the principal amount and interest for the investment period if the borrower’s payment is delayed for more than 60 days.
The borrower, in this case, is a Norwegian company. A contractor that has obtained the right to build two 3-floor apartment houses with a total area of 1.570 m2. The total land area is 3.100 m2 and the apartments are expected to be completed in 2020.
Under the project description, all kinds of additional information can be found: the nearest large city, building materials, when the project will be initiated, etc.
This project has been financed by 231 individual investors who have invested from € 10 to € 1.000. Investor 1 has invested € 105.00, investor 2 has invested € 10.00, etc.
This is why one can say project investments has become democratized.
How much can I earn?
Obviously, a 13% interest on a € 10.00 loan will hardly make you a millionaire. But if the interest will be re-invested and you add funds on a monthly basis the sum can end up giving you a nice monthly return.
This is on a long term view of course but all investments should be seen in this light. Otherwise, it’s speculation and if that has your interest you are on the wrong site. In general, the sky is the limit as the more you can invest the more you will earn – without working.
How to get started? Follow these few steps:
- Open an account with Grupeer
- Transfer an amount with TransferWise
- Choose the development project or business loan you want to invest in
- Press “invest”
Above screenshot is only a very small picture of all the possible investments.
- From left you have the ID of each specific investment.
- The name of the loan originator (also named Deal Partners)
- The initial loan offer
- Interest rate
- What is available to invest
You can specifically filter the types of possible investments by setting up a minimum interest rate, business type, which country you want to invest in, etc.
What holds you back? Get started today and start earning passive income!