Peer-to-peer (P2P) Lending, a.k.a. Social or Crowd Lending - Financial Model
Video Tutorial
Peer-to-peer (P2P) lending is getting to be a more established industry which has great investing opportunities for the average retail customer. Individuals make monthly returns in exchange for investing in another’s (or a business’s) debt i.e., people lend and borrow money with each other with the facilitation of a P2P platform, not a bank. The P2P platform receives a fee in exchange for facilitation.
This financial template takes into account annual net interest rate and cash drag. It also assumes all interest earnings will be reinvested, each month, for up to 55 years. This template enables users to figure out different return scenarios based on monthly interest payments and whether or not they keep reinvesting interest. “Loan parts” allow investors to continue compounding interest when returns are too small to reinvest in new loans. Users can minimize the effects of cash drag by reinvesting, enabling returns to grows as quickly as possible.
Nifty tools and visuals are included to help users build the investing case. Notes and comments are included to add clarity and understanding of what is happening in each tab.
The model can produce internal rate of return calculations, with consideration to initial cash investment, withdrawals and deposits (during the investing period), and the exit value.
It is recommended that users keep “spread out” to mitigate potential default risk, investing in low-risk loans (low default) but still have some embedded risk into the rate. Returns achieved will vary based on how risky the debt is.
This model assumes the effect of default interest/ late fees zero out the effects of capital loss, so it is important that users familiarize themselves with what their specific P2P lending platform does with default loans as well as what actions are taken in regards to collections, late fees, and default interest. The model displays returns as a function of the initial deposit.
A printer friendly summary tab is included to show the 10-, 25-, and 50-year time horizon, with helpful charts and visuals.
Note: I am not a financial advisor and this is not financial advice. Use this template at your own risk.
