What you should consider when investing on auxmoney & co

Crowdlending is all the rage right now. At the latest since banks have (virtually) stopped offering interest, more and more investors are turning to platforms like auxmoney& Co. to. Investments there promise high interest rates of up to 14%. Before you let it lure you in, though, there are a few things to consider.

1. Crowdlending does not replace the savings account

Even if it always sounds so simple in advertising: investing your money on a crowdlending platform is fundamentally different from putting money in a savings account or a call money account. These two banking products may be boring and low interest, but they're also pretty darn secure. Today, if I have 1.If I put 000 euros in a savings account at my savings bank or credit union, then I can pay back the 1.Withdraw € 000 at any time later. And there is some interest on top of that.

The bank to which I entrust the money works with the money, but assumes all default risks that arise from it. And even if the bank itself were to get into trouble, my credit is protected by various security systems. This is even required by law.

Crowdlending, on the other hand, aims to bypass these banks and split the margin between investor and borrower. However, this also eliminates the risk buffer. If I Max Mustermann by Crowdlending 1.If I borrow EUR 000, I have to hope that he will pay me back in full. If he doesn't do it, I'm just out of luck. Sure, the platform will take care of the dunning and debt collection for me. Nevertheless, I have a realistic total risk of loss with every single loan I make.

Crowdlending is therefore a high-risk investment. That's perfectly fine, you just have to be aware of it. Therefore, you should only invest money in crowdlending that you do not urgently need. And spread the investment as wide as possible: better give 100 x 25 euros than 1 x 2.500 euros. Finally, crowdlending engagement should only be a small component in a broadly diversified portfolio.

2. Know that you know almost nothing – about the borrower

As much as people rant and rave about banks these days, there is one thing they are really good at: collecting information about their borrowers and evaluating it in a targeted manner. Before a bank gives a customer a loan, it obtains a lot of information about them. These are usually salary slips, employment contracts, income-expenditure statement and insight into recent account movements. In addition, there is usually a SCHUFA query and – if you do not take out the loan with your house bank – also a bank report.

The bank knows a lot about the potential borrower and can therefore estimate the risk of default. If you invest money on a crowdlending platform, it's different. You will soon find out that you know almost nothing about the borrower. If you are lucky, there are a few incomes and roughly some expenses. And somehow there is actually always a fat plus. One wonders why these people need credit anyway. Because the information is usually completely implausible.

Where these people work, whether they are employed permanently or on a temporary basis. Whether you're a civil servant in a government agency or a company on the brink of bankruptcy, you're the one who knows. All this you do not know. In the end, you can only hope that at least the description text gives some hidden hints. Ultimately, however, you actually know nothing and must therefore rely entirely on a gut feeling and the score class of the platform. One more reason to spread your investments as broadly as possible.

3. Crowdlending is the "residual ramp" for borrowers

To many, the idea of beating the banks at their own game and arranging loans without them may seem appealing. However, you must not forget one thing: Banks have enormous experience with risk management and want to invest their deposits profitably. That's why, in Germany at least, pretty much everyone who is really creditworthy gets a bank loan. And that usually also at reasonable conditions.

So the question arises, who then takes loans on a platform like auxmoney. Because the banks are really fighting over the customers with a good credit rating, which ensures low interest rates. Whoever then nevertheless uses a crowdlending platform to take out a loan, usually does so against all economic sense. And who accepts conditions of over 10% for an installment loan, may only do so because he has been rebuffed by the banks. And they will – see above – have their reasons for doing so. Finally, they have a very precise insight into the economic and personal situation of the customer.

Ultimately, auxmoney's loan customers& Co. so either creditworthy or economically unreasonable. Neither of these are necessarily characteristics that make a good borrower. And so most crowdlending platforms are rather the residual ramps of the lending industry. This is not a bad thing, you just have to be aware of it. So don't just be blinded by the high interest rates, but factor in a pretty decent default rate into your calculation.

4. auxmoney& Co. have different interests than you

You should also consider another thing: Your interests are not congruent with those of the crowdlending platforms. Let's take a look at what your interests are. You invest money on the platform and want to have it back with interest over the life of the loan. In the end you want to have more money than before and the interest of the good loans should overcompensate the default risk of the bad ones.

What I could find in my so far half year in real money test? That many of the better borrowers are making early special repayments on their loans. This sounds great at first: I have invested money with risk and get it back early. So a risk has ended well. But wait: it is precisely the money of good borrowers that should remain invested for as long as possible against good interest rates. So you don't even want that back sooner than planned.

And here lies the conflict of interest: because auxmoney money earns its money from the successful mediation of loan contracts. They get a commission of 1% of the loan amount with the conclusion of the contract – and that from you! If the loan is paid back early, you will not get it back, not even pro rata temporis. auxmoney but is happy when a borrower his loan after a few months by a new loan, because then again 1% commission is due.

Who looks at the credit inquiries more exactly, it determines that a large portion is so-called "Aufstockungsredite". These are loans with which old loans are usually replaced by a new loan after a few months. Perhaps one you had invested in as well. The platform is happy and you make a long nose.

Because pay 1% commission to get 4 years long 10% interest sounds fair. But paying 1% commission and only getting 10% pro rata temporis for 3 months sounds much worse. If you reinvest the amount repaid, yes you will pay the commission again. If you do this every three months, the 1% commission has suddenly become a total of 4% – to the detriment of your return.

You can live with that, too, if the total return is right in the end. But you must also be aware of this in order to make a well-considered investment decision.

5. Crowdlending is at a tax disadvantage*

[I added this point on 27.12.Added in 2016 on the advice of Christoph Iwaniez. Thank you!]

But also the legislator does not really have a heart for crowdlending. Because the tax framework for private investors does not sufficiently take into account the special investment model. This already begins with the fact that the investments are neither bank deposits nor securities. And this means that investors cannot simply "settle" their interest income with the tax office by means of an exemption order, but must declare it with an interest certificate as part of their income tax return. This means more work.

Much more annoying, however, is another aspect. In the context of crowdlending, it is common for a certain proportion of investments to fail. In a broadly diversified crowdlending portfolio, the high interest rates of properly serviced investments will usually more than compensate for these defaults. But even if the investor actually gets off lightly in this way, the tax office can still throw a spanner in the works.

Because the capital losses are not recognized by the tax authorities for tax purposes. The interest received, on the other hand, is grds. fully taxable. Example: You get € 100 in interest, but at the same time you have € 100 in defaults. So the bottom line is that you came out of it with +/- zero. Nevertheless, you have to pay taxes (not counting the lump sum for savers), because since you cannot claim the capital losses, you have made a profit of 100 euros in the eyes of the tax office. The bottom line is that you – thanks to the taxman – with a loss from the investment goes out.

* I am not a tax advisor and this note is expressly not tax advice. I'm just stating my current state of knowledge here. If in doubt, ask your tax advisor or your tax office of residence.

Crowdlending still has its charm

But the five points mentioned above should not stop you from investing in crowdlending project. It is only important that you consciously consider them in your decisions. I have also focused substantially on auxmoney here because a) they are the relevant player in the German market and b) they hold the most pitfalls.

This is how it applies with early repayment z.B. essential for platforms that are focused on private customers. Because the legislator only grants consumers these free special repayment options – for corporate platforms at least this pitfall does not exist. And platforms like GIROMATCH, on the other hand, are aimed at borrowers with strong credit ratings and offer the banks a run for their money when it comes to terms and conditions. Here then z.B. that with the "residual ramp" not or only to a small extent.

So crowdlending still has its charm if you heed the following tips:

  1. Crowdlending is a risky investment – so only put a portion of your savings into loan receivables.
  2. Spread the risk on the platform to as many borrowers as possible. Better to invest 100 x 25 euros than 1 x 2.500 euros.
  3. Choose the borrowers consciously and at least sift through the sparse information that is offered. Does not respond to heartbreaking begging stories or nice pictures in the process.
  4. Be not greedy. High risk classes bring only a little more interest, but significantly more risk.
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