Alternative to the stock market? P2P loans - risks, opportunities and morals of the alternative investment.
In the last few days I have now found two three questions about P2P and Bondora Go and Grow in my timeline. Since I have been in this field for about 4 years, enclosed is a "short" report (tl;dr alert!) on this type of investing alongside traditional stocks, funds, ETFs, precious metals and other exchange traded investments. However, I would like to point out that I cannot fully name all the risks and side effects of this asset class here, nor will I go into every little detail of the strategy around P2P. ❗️
What are P2P loans?🏦
P2P loans, or peer-to-peer loans are nothing more than loans between private individuals. [Link 1 - Wikipedia] Borrowers and lenders are connected directly and "without" financial service providers, such as banks or intermediaries, and thus become direct contractual partners. 🤝Totally correct or 100% this is of course not entirely feasible, because these transactions must of course still be mediated. There are various platforms for this purpose, which offer the most diverse functions and accordingly also connect the most diverse interests or have slightly variable business models.
However, all of them usually have one thing in common: they have a marketplace through which lenders compete against each other in the form of an auction to issue loans to willing borrowers. Marketplaces where loans can be resold second, third or fourth hand, as it were, are then also common in order to be able to recover long-term loans ahead of schedule.
In Germany, P2P loans may be subject to approval in accordance with Section 32 of the German Banking Act (BaFIn). However, this also depends on the design of the offers listed on the platforms. To find out which legal rules apply to Bondora G&G, please refer to the corresponding legal texts. 👩🏼⚖️
What do I need to know about Bondora?💸
Bondora is a P2P platform which was founded in March 2008 by Peter Pärtel in Estonia. The company is based in the capital Tallinn and the founder is still the CEO of the FinTech company. On the platform, lenders can invest from one euro and choose between different products.
On the one hand, there is the "Portfolio Manager", Portfolio Pro and Go&Grow. Before we get to my used product (Go&Grow), short explanation about the other two products. With Portfolio Manger it is a semi-automated advisor, where the investors define their risk-return strategy, based on which the manager then makes the investments. With Portfolio Pro the whole system works in a more detailed way and is mainly addressed to the investors who have a very precise idea about the structure and risk appetite of their credit portfolio. As usual, the Pro version of an investment vehicle always requires a great deal of consideration and, above all, is only suitable for those who are familiar with the asset in question.
The borrowers come from three different countries: Spain, Estonia and Finland. 🇪🇸🇪🇪🇫🇮
How much return can I earn with P2P loans at Bondora? 📊
The expected return is stated by Bondora to be 8.19-16.19% p.a.. The current average interest rate is 28% p.a. CAUTION: As everywhere applies. Yield opportunities are always dependent on the risk that you are willing to take! Who invests in P2P loans with a bad rating, can therefore make a lot of return, but carries a disproportionately high risk of a total loss. Helpful for the assessment of a default of a loan is the so-called rating. This is based on the ratings of major rating agencies from AA (very good rating with a low chance of return) to HR (high risk, junk level, with a very high chance of return) or even without a rating.
How does Bondora Go and Grow work?📈
Bondora G&G is the third product of Bondora and from my point of view it works the most convenient. Bondora G&G is the automatic and therefore the simplest feature in the Bondora investment universe. Unlike the other two products, investors do not invest in specific, self-selected loans of personal "taste"; instead, investments are automatically made in a broad spread of different loans (at different interest rates and credit ratings).
This method is, at the risk of total loss, the "safest" way to profit from the peer-to-peer credit system. First disadvantage: Bondora itself alone knows in which loans and which rating is invested. Although Bondora publishes on their blog in the again some insights into the current credit metrics of Go&Grow, in how far these numbers reflect the reality - I do not know. [Link 2]
For the fact that Bondora mainly bears the risk of the G&G product, the expected annual return is not 10, 15 or more than 20%. Bondora Go&Grow has been offering 6.75% p.a. as an interest rate for years and has always been able to keep this rate. And so day after day (around 23 o'clock) the interest for the past day flows into the "clearing account" of me. Incidentally, Bondora G&G probably earns a much higher interest rate every day than the stated 6.7%. According to Bondora, the surplus is reinvested as reserves and thus used as a guarantee for a continuous interest payment.
If you always wanted to know how compound interest works, you can experience it live with the daily interest credit.
Is Bondora Go&Grow a (substitute for) a call money account?💰
NO. And for those who didn't understand: ABSOLUTELY NO!
Bondora G&G cannot and will not be able to replace a call money account and should not serve as a call money account for the investors. This is for a variety of reasons. One of the most important reasons: P2P investments are of course not protected by the deposit insurance of the EU or any country. Also, other typical overnight money features are simply missing and are therefore not sufficient for an overnight money substitute. Why Go&Grow is not a call money alternative is explained very well and in detail under [Link 3].
Another reason for an investment that is not typical for a call money: In 2020, Bondora set the deposit limit to 1,000.00 EURO per customer and month in the course of the corona pandemic. [Link 4] Bondora stated at the time that this was to ensure that all interested investors could enjoy the 6.75% return. Personally, I find this measure reasonable, as it can "guarantee" the security of 6.75% for a broad mass of investors in the long run. In the meantime, however, the platform had also reduced the limit to about 400€, but reversed this quite quickly. In addition to the disadvantage of the non-existent deposit insurance comes the availability of invested capital. One must keep in mind that a payout of the invested money can take up to several weeks. Why this is so, should be clear quickly. Bondora may have to find another lender for the liquidated capital from the pool of investors or its own marketplace, the loans continue to run, no matter "I" would like to get my capital back... So the payout may well drag on in tranches. However, even during the Corona peak period of March/April/May 2020, Bondora continued to pay out funds, furthermore, such a situation of partial payout has occurred only once in Bondora's 14-year history. Also, during this period, Bondora credited G&G with interest on a daily basis at all times.
For whom is Bondora Go&Grow suitable?💶
Basically, Bondora G&G is suitable for all those who want to add another alternative and, above all, stock market-independent asset to their portfolio in addition to shares, ETFs, funds, real estate or precious metals. Those who are satisfied with the yield of 6.75% p.a. achieved so far and are willing to take the risk can achieve further diversification in their own portfolio with Bondora G&G. The sum of 12.000€ annual investment should be completely sufficient for the start into the P2P world. Calculated on the year, this results in interest of 810€. Savings books (ATTENTION: IT IS NOT A SAVING BOOK ALTERNATIVE) can only dream of this. Who invests in Bondara Go&Grow, benefits from the possibilities that P2P offers, with minimal work.
What has to be considered with Bondora Go&Grow in terms of taxation?💸
Of course, I cannot provide precise tax advice here. However, there are basic statements that are generally applicable.
This includes, of course, the truthful information in the tax return in the KAP attachment. Here the received interest is to be indicated. Bondora offers on their pages the possibility to create a daily account statement or even aggregate a tax report. [Link 5] Tips on how to correctly declare P2P in your tax return can be given by a tax advisor or you can inform yourself on relevant websites. Under [Link 6] I have found a quite useful contribution to this.
How do I use Bondora Go&Grow?🤑
I have been investing in P2P loans for almost 4 years. In the beginning I tried myself and selected the loans manually and tried to achieve as high interest rates as possible. However, the default risk and the ratio of the to the expected return were not value and sensible enough for me. I then switched to Bondora Go&Grow and can now approach P2P in a much more relaxed way. I save a small part of my savings in Go&Grow every month by transferring money from my current account to Bondora via standing order. Important: For the automatic investment of deposited capital to work, it must be activated in the menu under "Go & Grow" - automatic transfer.
By making monthly deposits, the interest received daily grows regularly.
I set a maximum of 3-5% of my total portfolio as my investment size for Bondora Go&Grow. Also, in recent years I have taken advantage of the opportunity to pay out part of the money saved also for individual purchases of shares. So for me it is a good way to put money to work today for later stock purchases. Of course, I am aware of the higher risk, but I see it as purely practical, since the invested money is not needed for everyday things and would disappear in the long term anyway in stock investments. So the money is allowed to do something for me.
Advantages of Bondora Go&Grow:
- Easy and fast entry into the asset P2P loans
- Convenient deposit
- Favourable fee structure: withdrawal of invested money costs only 1€ fee, no other costs
- Bondora is quite transparent in its business figures
- Bondora is one of the largest and especially oldest providers in the field of P2P, the subject of trust
- Money is usually available in 2-3 banking days on the own account
Disadvantages of Bondora Go&Grow:
- I don't know 100% what loans Bondora invests in, exactly what risk to expect (other than total loss).
- NO savings account substitute!
- No deposit insurance!
- Stocks and ETFs, can make more returns
- Money can be paid out in tranches under certain circumstances
- Returns and interest are not guaranteed
Where is the morality?☝️
Of course, it is perfectly debatable whether peer-to-peer loans are morally acceptable. After all, we are talking about interest rates of 3% to 30% or more.... Anyone who invests in P2P loans must be aware that there are also people "sitting" on the other side who have to pay these interest rates. And here not only financing of real estate, cars or vacation trips play an important role, but it will certainly access a majority of people on this type of credit, which already have it from itself not easy in everyday life and life. Anyone who takes out loans at these interest rates is certainly not among the top 100,000 in this society.
And nevertheless there must be also such offers. I myself, working in the precious metals and pawnbroking sector, see this in my daily work. There are people who, under normal circumstances, no longer receive or want to receive a loan from the bank. And this concerns a broader amount of the population than one realizes. Let's start with students alone, but also go on to self-employed craftsmen or pensioners. These people have just as needs and can come on this way to financial means.
In life, nevertheless, each person has a certain choice. No one will be forced to choose this type of credit. Often people are even grateful for the opportunity to get money this way. Of course, investors do not get to know anything about all this directly. At least not when using Bondora Go&Grow. Here I don't see if a loan defaults or if the borrowers default. This can make investing easier, but one should not forget where the money comes from. With all the joy about the 6.75% daily interest payment, for me the moral claim and respect for the possibility of being able to invest is part of it. Taken for myself, this means that I very well follow the reports of Bondora on their blog regularly [link 7], just to regularly compare my moral reservations and to draw consequences if necessary. In the past 4 years, however, I have not noticed anything negative about this, which is why I like to use this possibility of investing away from the stock market here and now.
I will continue to use Bondora Go&Grow and use it for my purposes. I regularly save a small amount and receive interest on it on a daily basis. I use Bondora Go&Grow as a "workplace" for my capital earmarked for buying shares. As long as this is not invested in the market, it can work here at a solid interest rate of 6.75% p.a. and prove itself accordingly as an alternative asset in the overall portfolio. I am aware that this asset is NOT A DAILY MONEY ACCOUNT or REPLACE TO DAILY MONEY ACCOUNT!
Link Collection:
[Link 1 - Wikipedia]: https://de.wikipedia.org/wiki/Peer-to-Peer-Kredit
[Link 2 - Bondora statistics]: https://www.bondora.com/de/public-statistics
[Link 3 - No call money alternative]: https://p2p-game.com/bondora-go-grow-tagesgeld-alternative-mit-675-zinsen-lasst-euch-nicht-fu%CC%88r-dumm-verkaufen
[Link 4 - 1k€ deposit limit]: https://www.bondora.com/blog/de/planung-fuer-die-zukunft-bondora-setzt-auf-nachhaltigkeit/
[Link 5 - Tax 1]: https://support.bondora.com/de/wo-finde-ich-meine-steuerberichte
[Link 6 - Tax P2P]: https://enqome.com/de/p2p-kredite-steuern
[Link 7 - Bondora Blog]: https://www.bondora.com/blog/
