What does crowdlending mean?
Crowdlending is available for private households as well as in the commercial sector. Crowdlending involves a group of people coming together to grant a loan. Crowdlending is therefore different from a loan from a bank or money lending by single private individuals. The borrower repays the loan to the lender at a predetermined interest rate. For the lenders it is therefore a modern form of capital investment. The financing is organised via internet platforms.
How does crowdlending work?
Investors register online with a crowdlending platform. After verification, the investor has the opportunity to invest money in various loans. The loans to be invested in can be freely selected. Crowdlending platforms often offer an additional function for automatic investing. Criteria are defined - for example, the desired term of the loan or the interest rate - and a so-called autoinvest function automatically distributes the investment sum to the appropriate loans. Depending on the type of loan, the investor receives his money back on certain dates together with the interest payments or at the very end of the term. There is no direct contact between lender and borrower - the financing is handled completely digitally.
What types of crowdlending are there?
There are basically two different types of crowdlending:
Peer-to-peer: In so-called peer-to-peer lending (also known as P2P), money is invested in a loan to private individuals. This is often a loan to finance a private purchase - for example, a new car or the purchase of a new kitchen for your home.
Peer-to-business: In peer-to-business (also known as P2B), the loan is not taken out by private individuals but by companies. This allows companies to finance purchases or projects without having to involve a bank directly.
What are the advantages of crowdlending?
Crowdlending has several advantages - for lenders and borrowers alike.
For lenders, crowdlending is a modern form of investment that allows them to invest online with just a few clicks and earn interest. Mostly there are very low minimum investment amounts, so that the money can be spread over many different loans. The risk is distributed accordingly to the individual investments.
For borrowers, a loan from the bank is often associated with hurdles and a lot of effort, and not for everyone available and not everyone can or wants to borrow money from their circle of friends. For companies, too, the hurdles are sometimes high in order to obtain outside capital in the form of loans from a bank. Crowdlending is therefore a good way for borrowers to obtain financing without complications.
What is the difference between crowdlending, crowdfunding and crowd investing?
Crowdlending, crowdfunding, crowdinvesting - the terms sound very similar and are often confused with each other. Crowdfunding is sometimes used as a general term for crowdlending and crowd investing which means that crowdlending and crowdinvesting are subtypes of crowdfunding. Even though crowdfunding is by definition more likely to be in the area of donations.
Crowdfunding is usually used to finance social- or charity-projects. Often a charitable aspect is the focus here. People join forces to finance a specific project. Crowdfunding can be compared to a kind of donation and is usually also handled via an Internet platform.
Crowdlending for private individuals is used as an alternative to traditional consumer loans, for example to finance larger purchases such as a car or house renovation. Businesses use crowdlending to make necessary investments, for example to renovate an outlet or buy new machinery. The entrepreneur receives additional debt capital simply and unbureaucratically, while the investors, in this case the crowd, receive monthly repayments of interest and XXX. The borrower must repay the loan with a fixed interest rate. These loans are annuity loans, i.e. monthly or annual repayments with fixed instalments are foreseen. The interest rate is set by the crowdlending-platform, which assesses the creditworthiness of the borrower.
Crowdinvesting means, that people invest in a certain company, in real estate or a tangible asset in order to participate in future profits. In contrast to crowdlending, it is usually not a fixed-interest loan that is brokered, but a participation. Participatory loans are used as a form of participation, which come closest to an equity investment.
If money is to be invested on crowdlending platforms, there are a few points to consider
Check provider: Detailed research makes sense, despite the fact that the large number of providers on the market are reputable. But for example if the crowdlending platform is not based in Germany, you should be careful and check whether or which law applies in the case of disputes.
Diversify: In order to minimize the risk of a possible loan default, it makes sense to diversify the portfolio, i.e. to spread the available budget over several loans.
In summary, crowdlending is a good alternative to conventional bank loans for private individuals and companies and an interesting investment opportunity for investors. As an investor, however, the risks should not be lost sight of.