Not sure where to invest in 2020? Here’s 5 reasons why you should consider investing in loans.
If you’re thinking about investing in the current market, loan investment offers the same range of opportunities as the stock market, but with steadier returns and less volatility. Here’s why…
Stock market trading apps reported a surprising surge in new investors this year. Following the initial nosedive of the global economy in April, many saw the opportunity to seize on shares while the price had dropped, in hopes that the market would pick up again and raise the value of their investment.
One drawback of investing in the stock market is that with the current volatility, it’s hard to predict when the anticipated economic turnaround will be. Those who invest in low-price shares now may have to wait some time for a significant market recovery, as financial experts warn that the current “bear market” — the name given to the stock market when it’s in downturn — is far from over. In fact, in April, the International Monetary Fund forecast that global GDP will fall to -3% by the end of 2020* — that’s even less economic growth than there was during the 2008–2009 financial crisis.
In comparison to the stock market, crowdlending — or simply, ‘investing in loans’ — is a type of investment that offers steadier returns with less volatility, without having to wait on an economic turnaround. If you’re not familiar with crowdlending, the premise is simple. Lending companies will finance borrowers’ loans, and then offer private investors the opportunity to invest in those loans via a crowdlending ‘marketplace’ in exchange for interest. This article breaks down the reasons why crowdlending — sometimes known as Peer-to-Peer lending, P2P, or loan investment — offers unique advantages for potential investors in the current climate.
1. Loan investment offers steady returns with less volatility
Crowdlending gives you more control than market investment, by letting you choose your terms up front and then offering predictable returns across different maturity options. As crowdlending is a “peer-to-peer” model of investment, the terms are exclusive to the borrower, lending company and investor, so investors rely less on external factors to make a profit, such as whether or not the global economy is running smoothly.
Historically speaking, there tends to be less correlation between loans and stocks, than between stocks and other asset classes. For instance, while most stock markets are on a downward-trend at the moment, average loan investment returns rates are actually rising. If you already invest in the stock market, diversifying your portfolio with a different assets such as loan investment can help counter the impact that the financial crisis might be having on your portfolio.
2. The returns rates are rising
Since investment is all about making returns, perhaps one of the most compelling reasons to invest in loans right now is that many lending companies are offering investors high rates of return interest at the moment.
At the time of this article’s publication, more than 63% of all new loan opportunities available on the Mintos loan investment platform offered investor returns of 15% or more. Why? Simply put, when the effects of COVID-19 began to impact on the economy, some investors reacted by cashing out their investment plans during the uncertainty. The lending companies who supply loans are now offering higher interest rates than before, in order to encourage healthy competition back to the market once again. Of course, any type of investment carries a risk, but if you carefully consider your options and decide to invest, these higher rates of interest could result in attractive returns.
3. Loans are a sustainable commodity
If you’re investing in a particular commodity, it’s always reassuring to know that you’re investing at a good time, based on global demand. With loans, a ‘good time’ to invest in loans can actually be any time.
During a financial crisis, any business and individual may find themselves with a lower income or reduced liquidity as a result of job losses, closures and bankruptcy. This is bad news for commercial industries such as tourism and retail, who rely on customers with money to spend in order to buy their products and services. By comparison, the lending companies who issue loans will actually see an increased interest in their business during a recession, as people turn to them for financial help. But what makes demand for loans ‘evergreen’, is that even when the economy is strong, the same businesses and individuals who may need a loan in times of financial pressure, may also need a loan for everyday purposes, such as expanding a small business into a franchise, mortgaging a house, buying a car, and so on.
In this way, loans are a commodity that stays in constant demand worldwide, and gives crowdlending a unique advantage over other investable commodities, such as oil or gold. Even if loan investment comes with other risks such as the risk of borrowers’ defaulting on their repayments, or a lending company going bust during a recession– from an investor’s standpoint, this can actually be beneficial in that it presents a wider range of risk-and-reward options, and some investment platforms offer fallbacks to mitigate the risk of these scenarios.
4. An uncertain market lets you invest tactically
Crowdlending offers a lot of choice and flexibility when it comes to potential investment opportunities, such as short-term personal loans, car loans, and loans for agriculture and business, to name a few. While the demand for credit is backed by a relatively evergreen consumer need, the risk-factor of some types of loans can be impacted by global events and it’s possible to take this into account when making your decision (in the same you would if you were choosing individual companies to invest in on the stock market).
For instance, if you’re investing in personal loans during a time of economic uncertainty, loans secured with borrower collateral can offer greater investment security than those without. On the other hand, the returns on secured personal loans might be lower than unsecured long-term business project financing, since this is considered a “riskier” investment in the current climate.
5. The industry adapts to change fast
Crowdlending is part of a relatively new type of investment class, which largely took off in the wake of the 2008 financial crash by offering investors compelling returns during a recession. Although not all of the pioneering lending companies and crowdlending platforms from this time still exist, it’s fair to say that the big players in today’s crowdlending industry appreciate the importance of adapting to change quickly to protect their business.
Since lending companies trade on a product where demand increases during times of economic hardship, this comes with an increased risk that borrowers who apply for credit could default on their repayments. Lending companies already know this, which is why they take precautions to make sure they lend money responsibly, by tightening the eligibility criteria when borrowers apply for loans. This can be good news for investors, as it helps to ensure crowdlending’s sustainability as an investment class.
Investing in loans on Mintos
Mintos is the largest loan investment marketplace in Europe, with over 82% of customers rating us 4 or 5 stars out of 5 on Trustpilot. Once you sign up, browse through the wide range of loan investment options brought to the platform by 57 lending companies from 31 countries worldwide, along with a ratings system that grades the performance of every lending company on the platform. Plus, over 95% of loans come with a buyback guarantee.
Not sure which loans to invest in? Mintos offers an Auto Invest function that automatically invests money on your behalf over different loan types, maturities and lending companies, to create a diverse portfolio with attractive returns.
Head over to Mintos.com or download the app to get started.
*Source: https://www.imf.org/en/Publications/WEO/Issues/2020/04/14/weo-april-2020
