The principle of lending money has existed for centuries: someone who has excess cash lends it to someone who can put it to better use. For the loan, the lender of the money receives a quid pro quo in the form of interest.
Banks grew large with lending. But, due to recent changes in regulations and the emergence of various lending platforms, banks no longer have the exclusive right to lend to people and businesses. As a retail investor there are new possibilities and you can also get a return on your savings by lending to others. What are these new possibilities?
Lending money to peers
Peer-to-peer means that you, as an individual, lend money to other individuals. An online lending platform connects individuals who want to borrow money, for example to buy a new car, to other individuals. Through such a platform you lend to someone you don’t know, which makes it a business transaction. The platform splits the loan, so that several retail lenders have the opportunity to contribute part of the requested loan amount. This way, multiple retail lenders put together a larger amount of money.
Lending money to companies
Not only people need financing. Companies are also looking to lend. Just like peer-to-peer, a lending platform connects you to the company. A company can borrow money to invest in marketing campaigns or an office renovation for example. The platform analyses the company, assesses the risk and determines the interest rate and duration. The platform also makes a project description in which it summarises the analysis and provides information about the company and the project. After reviewing the description you, as an investor, make the decision to lend. Through lending platforms, lending money to SMEs is very accessible. On October, you can lend from only €20 per project.
What lending platforms are there?
There are many lending platforms throughout Europe. Here you can find an overview of the largest platforms. Because all these platforms are online, you can invest from pretty much all over the world. However, most platforms still have a focus on a specific region in which they originate borrowers. It is impossible to design a global credit analysis; a good credit analysis requires local knowledge of markets and regulations. As October, we have a focus on France, Germany, Italy, Spain and The Netherlands.
Next to regional differences, there is also a difference in direct vs. indirect lending platforms. Direct lending is simple. You sign a loan contract directly with the borrower, through the platform. October is an example of a direct lending platform. With indirect lending, there is a party in between: a loan originator. The loan originator is responsible for granting the loan and offering it on the platform. Therefore, you have less insight in who is borrowing on the platform and you’re dependent on the risk analysis of the originator, rather than the lending platform. The added risk does usually result in a higher average interest rate on indirect lending platforms.
Selecting a platform? Pay attention to this!
It is important that you choose a platform that suits you. After all, you are going to invest part of your savings through this platform. Keep in mind the following 5 points:
The interest rates
Your return depends on the interest rate. Most platforms provide a range of interest rates you can expect, for example between 2.5% and 9.9% on October. A higher interest rate means a higher risk.
One platform charges a management fee, another platform charges a fee for making a transaction. Some platforms do not charge any fees. Your return also depends on the costs; the higher the costs, the lower your return.
The minimum investment
Choose a platform that matches the size of your investment. With a high minimum investment, your diversification possibilities may be more limited. As a result, you can protect yourself less against risk.
Ease of use
Take a good look around the platform before you start investing and download their apps. Make sure the platform works properly and meets your expectations. Registration is free for most platforms.
Almost all platforms share statistics about their loans. For example, the statistics provide insight into how many projects are in default and what the net return is. From this you can also deduce how active the platform is.
Next to retail investors, there are other investors that can use the platform. A number of platforms allow large, institutional investors to invest. This gives an indication of the professionalism of the platform, because institutional investors normally have the highest standards.
With October, you can lend from €20 to companies from The Netherlands, France, Spain and Italy. You can use the October platform and app free of charge; there are no costs for investors. Next to retail investors, institutional investors and the management of October invest through the platform. Like this, they align their interest with those of investors. Have a look at our reviews or sign up directly to give it a try!