Lending Money As An Investment: How Risky Are Personal Loans? As a private person, money has so far been borrowed only to help friends or family members, mostly to help someone close to you and for no hidden reasons. On the other hand, lending money for banks has long been an asset class in its own right, as loans can often yield significant returns. Meanwhile, various mass-lending platforms also allow private individuals to participate in the lending business and at higher-than-average interest rates.
What are the risks of lending money?
The granting of personal loans is particularly suitable for risk-conscious investors. You should be aware that the money you have invested can be lost entirely if, contrary to expectations, the loans you have given are not paid back. However, as with many investments, the higher the risk, the higher the possible return. Because borrowers with bad credit ratings also pay higher interest rates.
On the other hand, when evaluating the borrower, you are basically on your own, because the online loan marketplace usually does not offer any advice. So first of all, the question arises: Who do you lend money to privately?
If you want to borrow your cash privately, you often have to make smaller investments. Whether the car has to go to the workshop or a new washing machine is needed – sometimes you can’t get around a loan.
Nevertheless, those interested in personal loans are often characterized by one characteristic that makes them suspicious: They are mostly classified by banks as not creditworthy and therefore have no choice but to accept the overpriced interest rates on a personal loan.
Besides, there is no possibility of credit advice when granting loans privately, as one can usually take advantage of at banks. First of all, the borrowers largely independently assess whether their financial situation permits (further) credit. The respective credit marketplace then checks them, and their solvency is rated. But what criteria are used here?
The Credit Rating
The solvency check is carried out differently depending on the provider. The underlying information is obtained directly from those interested in credit or official credit agencies. In some cases, behavioural data is also recorded and incorporated into the credit check. In some cases, the loan is refused. For the rest, individual ratings are set, which indicate the probability of default in repayment on the part of the borrower.
However, investors are not given a detailed insight into how the rating came about. You only find out what the loan is used for and possibly how it should be repaid – provided this information is made public by the borrowers. This means that an investor who lends privately online has far less information than a bank, for example.
What happens if there is a payment default?
If borrowers are unable to repay the privately borrowed money, the credit marketplace initiates a dunning process similar to a bank. If payments continue to fail, a debt collection company will be engaged. Whether the loaned money will ultimately be repaid to the lender (s) then depends on the borrower’s solvency. In the worst-case scenario, the lenders get nothing.
What is the alternative to lending?
One sensible alternative to real estate in crowd investing is to lend. In theory, money is also borrowed via an online platform here. However, no loans are given to private individuals, but intermediate capital is raised for real estate projects. Since the borrowers are professional real estate developers, a certain amount of financing and project implementation expertise can be assumed.