What Is Crowdlending?

Crowdlending, also known as peer-to-peer (P2P) lending is a financing model where funding is obtained directly from an individual. Both traditional bank funding and crowdlending involve two parties: the lender and the borrower. However, crowdlending investors can set a higher interest rate than a financial institution due to higher risks. Lenders have full control over which project to invest in. They can use their own judgment in assessing risks and making decisions. Furthermore, there is no need to lend the entire sum. You can lend a small part of it and still enjoy the benefits. 

How does Crowdlending Works?

The crowdlending process is pretty straightforward. The steps listed below describe a typical funding process via a lending platform, such as LendSecured:

1. A borrower completes an application form describing their business idea thoroughly on our platform.

2. We access the project risks and determine the credit rating of the potential borrower. Based on this evaluation, we assign the annual interest rate and repayment term. [1] [2] [3] LendSecured’s projects come with a personal guarantee from the business owner and/or a three-way agreement (for the grain projects), where the borrower undertakes to repay the loan.

3. Once we approve the borrower’s application, it is published on our site in the “Projects” section. Each entry is transparent, so potential lenders can see the full sum, repayment term and interest rate, guarantees, and project description. Projects are assigned an individual number along with the borrower’s name.

4. Potential investors review the lending options and evaluate them. They can choose to lend the whole sum or part of it.

5. The borrower is accountable for paying the interest rate at specified periods.

6. We charge a specified fee for providing the services.

What Are the Benefits and Risks of Crowdlending?

Crowdlending is beneficial both for the investor and the borrower. Firstly, the lender can opt for a higher interest rate with a higher-risk project or go for a safer option with a lower interest rate. They can choose which matter to support following their own business knowledge or moral views. In other words, the investor has full freedom of choice.

Secondly, the investor does not have to lend the entire sum. Instead, they can divide their budget over several projects and thus minimize the risks.

Thirdly, it is fairly easy to get started with crowdlending. The EU Directive requires that “before a non-sophisticated investor enters into an investment of an amount that exceeds the higher of either 1000 EUR or 5% of his or her net worth, the crowdfunding service provider shall ensure that such investor: (i) receives a risk warning; (ii) provides an explicit consent to the crowdfunding service provider; and (iii) proves to the crowdfunding service provider that he or she understands the investment and its risks.” Apart from that, there are no special requirements such as a specified capital or education. If a lender already has some investment experience, all they need to start is register on a dedicated platform.

Some reasons for not qualifying for a bank loan, however, are generally considered safe for the investor. A bank may consider the borrower’s business idea too risky, though if the investor sees potential in it, there’s nothing wrong with supporting the matter. An individual may also be paying off a mortgage or another bank loan at that time, and some banks do not issue multiple loans at once. Another common reason for someone not qualifying for a bank loan is a too young age. Lastly, during recess, financial institutions may not issue funding even to individuals with adequate credit ratings.

Apart from potential risk, investors must be aware of the lack of government protection. Most government legislation, including the European Union legislation, do not provide insurance on crowdlending. It is the lending platform’s responsibility to help the parties resolve their issues in case of the borrower failing to repay the loan. Furthermore, some governments require lenders to meet certain requirements to qualify.

How to Invest Wisely with Crowdlending Model?

 In the crowdlending model, the investor serves as a financial institution and should therefore take complete responsibility and evaluate the risks. Here are some tips for minimizing risks and maximizing investment returns for peer-to-peer lenders:

1. Diversify rather than invest in a single project. Let’s assume you have $1,000. Instead of lending the whole sum to one borrower, divide it into 10 loans of $100 or even smaller. This way you minimize the risk of losing all money if a project does not work out.

2. Mix low and mid-risk investments. Low-risk loans also have lower interest rates. While it is the safest option, you are unlikely to get high investment returns. Thus, take higher risks by investing in mid-risk projects. We recommend avoiding high-risk projects, though you will not find any of them on LendSecured.

3. Keep re-investing. If you only invest occasionally, your investment returns will decline as the interest repayment terms get to an end. The core objective is to save a part of your investment returns while constantly remaining invested to maintain and maximize your profit.

4. Start slowly. There’s no better way to learn something than personal experience, so gaining some experience on lower investments is a smart idea.

5. Choose the lending platform wisely. A good crowdlending platform strives to minimize investment risks by pre-evaluating each project and providing guarantees.

Support the Community, Get Profit

Any financial decision must be informed, evaluated, and secured. Hopefully, our guide has made investments less overwhelming and provided you with all the necessary knowledge on crowdlending. Don’t hesitate to contact us via email if you have any questions left regarding our platform or investments. For faster support — feel free to join our telegram chat where you can find fast support both from us and fellow investors. Our team’s mission is to bring confidence and protection to both parties of the agreement.