Investing in loans has become one of the most accessible ways to start building passive income in recent years. Unlike traditional investments such as stocks or real estate, this model is easier to understand and often available with relatively small starting amounts.

In this article, Kristiāns Purviņš, Head of the TWINO Investment Platform, explains how investing in loan-backed securities works, how this type of investment has evolved, who it may suit, what the main benefits and risks are, and how to make thoughtful decisions and avoid the most common mistakes when learning how to start investing in loans online.

How has investing in loans evolved historically?

Although loan investing may seem like a modern financial innovation today, the underlying idea is ancient. People have been lending money to each other for centuries.

Historically, money was initially lent informally, usually between people who knew each other. Later, banks entered the field, acting as intermediaries by attracting deposits and issuing loans, earning from the spread between interest rates.

The digital age brought new opportunities to this field as well. With the development of technology and financial innovation, broader possibilities emerged to connect investors with the loan market through online platforms. In the European Union and Latvia, this sector has evolved into a regulated segment in which investors access the loan market by purchasing loan-backed securities issued by licensed investment brokerage firms.

Today, loan investing has become a significant alternative investment segment in Europe, offering investors the opportunity to access the loan market in a regulated environment without the limitations of traditional financial intermediaries.

How do loan platforms work?

To understand how to invest in loans, it is important to grasp the basic operating principle of loan platforms. It is not complicated at all.

• The borrower applies for a loan. A private individual or business applies for financing from a loan originator.

• Risk assessment. The borrower's solvency, credit history and other factors are analysed.

• Issuance of loan-backed securities. Based on the loans issued, the platform issues loan-backed securities with a specific interest rate and term, which are offered to investors.

• Investors purchase the securities. The loan portfolio serves as the basis for the securities purchased by many investors, each with a relatively small amount.

• Repayment with interest. Borrowers make regular payments, from which returns are paid out to the holders of the securities.

This model makes it possible to participate effectively in the loan market and build predictable income, while benefiting from the security of regulated financial instruments.

Who is investing in loans suitable for?

Investing in loans is not a universal solution for everyone, but it can be especially well suited to certain groups of investors.

Beginners

If you are only just starting to take an interest in investing, loan platforms offer a simple and understandable way to begin. No in-depth knowledge of financial markets is required, which makes this approach a strong starting point for anyone exploring investment basics or wondering how to invest safely.

Investors Interested in Passive Income

Loan investing allows you to build a regular cash flow on top of your salary or other income, making it a practical option for anyone exploring how to invest for passive income.

For Portfolio Diversification

This is a way to complement traditional investments and reduce the overall risk of your portfolio.

For Those Looking for Fixed Income Investments

Unlike stocks, where returns can be volatile, loan-backed securities typically offer predictable interest payments, although returns are not guaranteed and depend on borrowers meeting their payment obligations.

Comparison with other investment types

To better understand where loan-backed securities fit into the broader investment landscape, here is a brief comparison with other popular instruments.

Loan-backed securities

Potential yield is moderate, approximately 6 to 12% per year. Risk is moderate, liquidity is moderate, and the entry threshold is low. Suitable for passive income generation and portfolio diversification.

Bank deposits

Potential yield is low, typically 1 to 3% per year. Risk is very low, liquidity is high, and the entry threshold is low. Suitable mainly for capital preservation rather than growth.

Bonds

Potential yield is low to moderate, approximately 2 to 6% per year. Risk is low to moderate, liquidity is moderate, and the entry threshold is moderate. Suitable for building a stable income stream.

Stocks

Potential yield is moderate to high, historically around 7 to 10% per year or more over the long term. Risk is high, liquidity is high, and the entry threshold is low. Suitable for long-term capital growth, but with greater short-term fluctuations.

Real estate

Potential yield is moderate, approximately 5 to 10% per year. Risk is moderate, liquidity is low, and the entry threshold is high. Suitable for capital appreciation combined with rental income.

Why loan investing sits between safe and risky instruments

Loan-backed securities occupy a "middle ground" position between safe but low-yielding investments and riskier but potentially higher-yielding instruments. This is precisely why they are often included in a diversified investment portfolio as part of the broader category of alternative investments.

Main advantages

Regular income

One of the biggest benefits is the ability to receive regular payments, which helps plan personal financial goals.

Accessibility

You can start to invest in loans online with relatively small amounts, which makes this type of investment accessible to a wider audience. On the TWINO platform, the minimum investment starts at just 1 euro.

Simple mechanism

The investment process is easy to understand. The investor purchases loan-backed securities and receives regular interest payments. Modern regulated investment platforms, including TWINO, are designed so that account creation and the investment process are intuitive even for people with no prior experience.

Flexibility

There is an option to automate your investing and tailor your strategy to your goals and needs, for example by using the Auto-Invest feature.

Reinvestment opportunities

By regularly reinvesting the interest received, investors benefit from the compound interest effect, which significantly increases the total return over the long term.

How are returns generated?

Returns are generated from interest payments made by borrowers, which are passed on to the holders of loan-backed securities in accordance with the terms of the security. The higher the interest rate, the higher the potential yield — though the level of risk must also be taken into account.

In the long term, reinvesting — putting interest income back to work — can also significantly boost an investor's returns by harnessing the compound interest effect.

Main risks

Credit risk

There is a risk that borrowers may be unable to meet their obligations and repay their loans. This can affect the return on loan-backed securities and the investor's overall yield.

Liquidity risk

The investment is typically made for a fixed term, and it is not always possible to convert it back into cash quickly if such a need suddenly arises. Some products, such as TWINO FLEXI, offer greater liquidity.

Platform risk

The reliability of the platform is one of the most important factors. That is why it is essential to choose licensed platforms that operate in accordance with regulation and adhere to investor protection principles.

Market and macroeconomic risk

During economic downturns, the number of borrower defaults may increase, which can affect the return of the entire portfolio.

How to reduce risks?

For investing in loans to be sustainable and predictable, it is important to recognise and manage risks. Although it is impossible to avoid them entirely, they can be significantly reduced by following several principles.

Diversification

Diversification is one of the most important principles in any type of investment. It means that capital is spread across many different loan-backed securities.

In practice, this means that instead of investing the entire €1,000 in a single security, the amount is split into 50 to 100 smaller portions. If one loan is not repaid, the impact on the overall portfolio is minimal.

Assessing loan quality

Not all loans are created equal. A higher interest rate often means higher risk. That is why it is important to look not only at potential returns but also at the borrower's profile, the type of loan, and other risk indicators.

Automating investing with rules

Many platforms offer automated investment tools that allow you to define criteria such as risk level, term and interest rate. This helps avoid impulsive decisions and ensures a consistent strategy.

A long-term approach

Loan investing is not a get-rich-quick instrument. In the short term, results can fluctuate, but historically, a disciplined long-term approach has delivered more predictable results.

Choosing the platform

When starting your investment journey, choosing a reliable partner is one of the most important decisions. TWINO is an investment brokerage firm licensed and supervised by the Bank of Latvia, operating for more than 10 years, and since 2015 it has helped more than 60,000 investors access the loan market across Europe. In the event of insolvency of a licensed investment service provider, investors are entitled to compensation of up to €20,000 under the Investor Protection Law.

Most common investor mistakes

Even though investing in loans may seem straightforward, beginners' results sometimes fall short of what they could be, due to a few typical mistakes.

Investing in one or a few securities

One of the most widespread mistakes is insufficient diversification. By investing in just one or a few loan-backed securities, an investor takes on a disproportionately high level of risk.

Focusing only on the interest rate

A higher interest rate looks attractive, but it is often associated with higher risk. In the long term, a balanced approach generally delivers better results.

Impatience

Some investors expect quick results and lose motivation if returns initially seem lower. However, loan investing is a long-term process.

Not using the income

If interest income is not reinvested, the compound interest effect — which has a significant impact on total profit — is lost.

Emotional behaviour

Market fluctuations or individual problematic loans can create the urge to make impulsive decisions. A structured strategy helps avoid this.

Failing to assess the platform

Not all investors pay sufficient attention to the platform's security, regulation and reputation. This can increase risk that is not related to the loans themselves.

Taxes

When planning your strategy and expected returns, you should bear in mind from the outset that in Latvia, interest income earned by private individuals is subject to personal income tax. If tax is not withheld automatically, the investor must declare it in their annual income statement. This requires a small amount of discipline, but platforms usually provide reports that make this process easier.

This article does not constitute tax advice. In each specific situation, we recommend consulting a professional tax adviser or the State Revenue Service. You can find more on this in the article on investment taxes in Latvia, which describes calculations and payment procedures in detail.

In conclusion

Investing in loans is a modern way to build passive income and put your available financial resources to effective use. It combines a simple mechanism with accessibility and flexibility, making it an interesting choice for both beginners and more experienced investors.

If you want to take your first step or deepen your knowledge of how to invest in loans, we invite you to explore the TWINO offering on our website, examine the available options and start building your investment portfolio today.

Email: [email protected]
Address: Dzirnavu iela 42, Riga, LV-1010, Latvia

This material is for informational purposes and is not individual investment advice.