Is P2P lending worth it?

Based on statistics from Mintos P2P lending platform.

If you would browse the net for passive income ideas sooner or later you would read that P2P lending is a great source of passive income. Although it comes with notes that it is pretty risky as well. In this article I will share results of different investment simulations based on P2P statistics found on Mintos home page.

The stats from Mintos

  • Average annual return: 11,89%
  • Number of defaulted loans: 7,69%

Impressive.

Simulation – Mintos case

I ran 1 million simulated investments with a 7,69% chance that any of them will default but if they don’t go bust they give 11,89% annual return. And even though I reran the simulation couple of times (so more millions of simulated investments) I got same result:

  • Investors have the default rate of 7,7%
  • Investors annual return is -4,3% loss.

Simulation – bit worse than Mintos

For this simulation I assumed that return stays the same since most of P2P lenders offer 10% – 12% returns, but for default rates will be at the same amount.

  • 11,8% of investments default
  • Investments bring 13% loss

Simulation – Bondoras case

It is really difficult to get default rates from Bondora directly but I found some info here.

Based on that I set default rate to 24% and return rates to whooping 20,93%.

With these risky end stats we lose 32% annually but let’s check the safest option on Bondora: Risk of default 13,06% with returns averaging at 25,8%:

  • Annual return: – 3,56%

Conclusion

It looks like unless P2P platform provides risk free investment opportunities, they do not seem appealing except a case when loosing 4% per year is your most profitable option.

Additionally there is a credit risk of the P2P company itself. They are not around for a long time and we don’t know if they will live through next financial crisis.

After playing around with my simulator I found that we can get into profit if we manage to lower the default risk to 4%. But there are platforms that offer safe investment opportunities where the only risk You take is the risk of that platform going bust. One of such platforms is Twino.eu (can’t do simulation for it since they don’t publish default rates for loans in their platform) but there must be others as well.

Just wanted to add one final conclusion: The high number of recommendations to invest in P2P lending can mean only one thing – P2P lending companies have some good affiliate rates. You can check the affiliate program whenever somebody or some article suggests You should invest in P2P lending. 

Stay safe! 🙂

5 thoughts on “Is P2P lending worth it?

  1. To be honest, your analysis seems quite bad in this case. I’m all for simplification, but with this one you could have just used a randomizer to pick some numbers for you just as well.

    I’m not sure what method you used for your simulation, but the results seem far from actual situation and don’t seem to make much sense. I suppose you’re using return (figure after defaults) as something out of which you’re deducting defaults again?

    In addition, large part of loans on Mintos have a buyback guarantee, so loan defaulting has no direct effect on the return, as long as the loan originator doesn’t go out of business.

    For Bondora, a default rate of 50% is not that much of an exaggeration lately.

    Analyzing the loan performance isn’t quite as easy as it may seem initially.

    1. Hi,

      Thank you for comment.

      To my mind main problem for these platforms is that you have no way to estimate the risk you are taking.
      How would you valuate risk of borrower going bust?
      And who will give you buyback guarantee in economic downturn?
      I am not sure how to answer these two questions on counterparty risk and platform risk so I dumbed the whole situation down to mean return from investments.

      I generated simulations by generating a random choice for loan to go bust or not with weights according to chosen default rating. If bust, return is -1 otherwise the average platforms return rating.

      The whole case here is about risky loans (without buyback guarantee) since the average return for risk-free investments is known without any simulations.

      You are correct, credit models are complex. Within this article I simplified it down because I had no information about the underlying a of these loans.

  2. In your simulation does it matter when the loan defaults? In real life it sort of matters if it defaults on day 1 or near the end.

    1. Good question.
      I made the simulation without considering either interest got paid or not.
      Now, thinking about it I could had implemented a random variable from 0 to 1 for probability of getting the interest prior to default. This would increase the average return of risky assets.

    2. Also just wanted to add that I couldn’t find any statistics that would say how often loans defaulted after Interest was paid.

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