- Lars Wrobbel makes 2,200 euros a month in passive income by investing in peer-to-peer loans.
- Peer-to-peer investing involves making loans with high interest rates to private individuals.
- Wrobbel told Insider how to get started and his other tips for investing in the loans.
This is an edited, translated version of an article that originally appeared on July 14.
Lars Wrobbel said he began investing in peer-to-peer loans because he wanted to invest in a product that didn’t rise or fall with the stock market.
“This year, when almost everything is down, P2P loans are up,” Wrobbel told Insider.
Wrobbel is one of Germany’s best-known experts on peer-to-peer loans; he runs the country’s largest blog on the subject and has also written several books on it.
Investing in peer-to-peer loans works through online platforms such as Bondora or Mintos, Wrobbel said. On platforms like these, you lend money to private individuals and earn high interest rates on relatively small loans, he said.
The 38-year-old said he initially earned only a few cents a month with his investments in the loans, but now he makes about 2,200 euros, about the same in US dollars, in interest each month. He’s now invested about 350,000 euros in peer-to-peer loans, he said.
You can make annual returns from about 6 to 18%, Wrobbel said. But the average return is 9% a year, he added.
As an investor, the only information you can see about a loan is the reason it’s being taken out, Wrobbel added. Other than that, the process is completely anonymized, he said.
“I don’t choose the loans; each platform uses an automatic portfolio builder,” he added.
So if you deposit 1,000 euros, the platform distributes this among various loans, Wrobbel said.
“In principle, it’s like a fund that tracks hundreds of stocks,” he said.
You can set certain filters on the types of loans that the platform will include in your portfolio, Wrobbel said. You can filter loans by the borrower’s credit rating and country.
Wrobbel said he’d invested in more than 400,000 loans, adding that while this might sound like a lot, it’s normal when investing in peer-to-peer loans to protect yourself from losses. If you invested 1,000 euros in just 10 loans, and three defaulted, it would hit your portfolio hard, he said.
His rule is to invest a maximum of 1% of the money he has on the platform in a single loan, so with 1,000 euros, he’d invest no more than 10 euros a loan, he said.
“Don’t just invest in consumer loans, but look to invest in other types of loans as well,” he added.
The biggest mistake peer-to-peer investors can make is to “chase returns,” Wrobbel said, adding: “Unfortunately, there’s a lot of fraudulent platforms that quote unrealistic returns.”
It’s important to pick a “decent platform,” he said, which means looking for those that have been in the market for a while and have audited financial reports that you can look at.
He said one platform he had used went out of business.
“That was a poorly managed platform, and I lost around 2,000 euros,” he said.
He said there were two key ways you could protect yourself from those kinds of losses. You can research a few solid platforms and continue to rely on them, or you can spread your investments across many platforms and in thousands of loans, he said.
On average, 5% of loans default, but if you’re broadly diversified, this is “not a problem,” Wrobbel said.
“I have hundreds of thousands of loans, so, of course, I’ve lost thousands at times. But that’s just part of the normal day-to-day business,” he said.
You should still be wary of the risk involved, he said. Ultimately, you’re lending your money to people who have often been turned down by banks.
Wrobbel said that because of this risk, it’s important peer-to-peer loans are only part of your investing portfolio.
Peer-to-peer loans account for about 17% of Wrobbel’s, he said, adding that he wouldn’t let that figure go past 20%.
“But I wouldn’t recommend anyone to go that high, as the industry isn’t mature enough yet, and the product itself is really risky,” he said.
When starting out, Wrobbel said putting 5 to 10% of your investments in peer-to-peer loans would be a good amount.
“In the current environment, I’m really happy to have peer-to-peer loans in my portfolio because it helps to keep my whole portfolio stable,” he said.
Wrobbel said he thought that more of his loans would default because of the cost-of-living crisis but that his diversified portfolio made him more relaxed about this.
“Personally, I’m not too worried about anything going down the drain,” he said. “I just have too many loans for that.”