Peer-to-peer or P2P lending enables borrowers to loan money directly from investors with the absence of a middleman. It’s also called ‘crowd lending’ or ‘social lending.’ P2P lending platforms or websites set the terms and rates for the different transactions concerning borrowers and investors.
P2P lending is said to highly favor both borrowers and lenders. People seeking loans find it a great alternative to traditional bank loans for their better rates. On the other hand, P2P lenders or investors usually get a better cash savings return compared to a bank savings account or certificate of deposit or CD.
Are you planning to become a P2P investor soon? Check out the following helpful tips to know when making an investment in peer-to-peer lending.
1. Equip Yourself With The Right Information
Have the right knowledge about peer to peer lending, especially if this is a new investment you’d want to add to your current portfolio. You’ll find plenty of helpful resources online that can help you fully understand how it works and the best techniques to employ to grow your cash savings in P2P lending.
Here are a few things you need to check before investing in P2P lending:
Before you start to invest in peer-to-peer lending, determine the borrower requirements first to have an idea of what type of borrowers your money will go to.
Generally, borrowers must be at the age of majority before being considered for a loan. Most P2P lending platforms are said to check the borrower’s credit reports to identify any information that might exclude them from a loan. These reports contain vital financial information ranging from bankruptcy records to inquiries made in the last six months. Publicly available records would be used as well.
Lastly, many P2P companies require borrowers to at least have one active bank account.
Repayment refers to the amount of time allotted to the borrowers to be able to pay back the money they owe. Most P2P lending platforms offer three- or five-year repayment terms.
You have to know the minimum amount of money you can pour into the peer-to-peer lending platform.
You may also need to find out and consider other fees involved. Furthermore, there are annual return interest rates for P2P lending investments that you need to study carefully. It’ll be discussed in the next item below.
2. Determine The Annual Returns
Peer-to-peer lending provides unsecured personal loans to borrowers. In general, investors are believed to enjoy an average annual return rate of 5% to 7%. A portfolio of combined credit grades can produce double-digit returns.
Besides the yearly return, check how much the P2P lending company charges for other fees such as the management fee, which is typically pegged at 1%, and the like. Like any other investments, placing money in P2P lending also has risks. To mitigate the risks, you’ll need to set a reasonable allowance in case of P2P loan defaults.
3. Study The P2P Lending Platform’s Track Record
It’s better to invest in a P2P lending platform with at least one to two years of tenure in the business. Here’s how to determine their track record:
Check The P2P Company’s Performance
Study the platform’s performance instead of only relying on their estimates and projections. But of course, excellent past achievements can’t guarantee its future performance. However, an experienced platform has already dealt with a significant number of technical errors and operational flaws. This may guarantee a more stable system for your money.
Check The P2P Lending Website
Browse the P2P lending official site to find out their terms and offerings.
Browse and study the opinions voiced by past and current investors on different review sites. Some of them can be found on social media too. Get insightful ideas on how they succeeded in this form of investment.
4. Take Advantage Of Automation
Peer-to-peer lending companies allow investors to choose notes based on specific criteria, such as the loan type, credit-score range, debt-to-income ratio, and loan term. It means that you can control the important variables that surround your P2P investment.
For more straightforward P2P investing, you can take advantage of automated online services to handle this process for you. P2P automation utilizes a financial software program to streamline workflows for loan processing through analytics.
Check the following advantages of using different P2P automation platforms:
Analytics back-test loan criteria to help investors generate the highest returns possible. P2P lending automation tools can help you execute your P2P investments with minimized risks.
Start P2P investments in less than a second after loans have been listed on the P2P website.
You can track the status of your peer-to-peer portfolio instantly through the site. Also, you can reinvest your funds once your notes mature and when cash becomes available.
5. Balance Rewards And Risks
Remember that investments with higher-than-average annual returns have certain risks involved. Because P2P loans are unsecured or not requiring any collateral, there’s a risk that borrowers may default on payments.
So, how do you balance the rewards and risks of P2P investing? There are different ways to successfully invest in peer-to-peer loans to maximize returns and minimize risks, such as the following:
Diversify Your Holdings
Instead of funding an entire loan, you can invest in notes from P2P lending platforms that cost around USD$25. It means that if you want to invest US$10,000, you can spread it across 400 loans, which promotes variety.
Spread Out Investment Returns
In P2P investing, your money earns returns based on credit grading. It means that the best quality loans have the lowest returns usually pegged at less than 5% a year. So, you may want to spread your investment to lower-grade loans for double-digit gains.
Spreading your capital across various loan grades helps balance the rewards and risks of a P2P loan investment.
Limit Your Investment
During an economic crisis, there’s a high potential for borrower defaults because most people are trying to save money for emergency purposes. Hence, limit your investment to a small percentage or preferably venture to high-grade loans during times of economic uncertainty.
Reinvest Loan Payments
P2P investments are self-amortizing, which means that reinvesting isn’t automatic. Make sure to reinvest the loan payments you receive by purchasing new notes. Otherwise, your returns decline when your loans pay down.
Gain more control of your investment in peer-to-peer platforms than other investment vehicles. It’s crucial to fully understand how this investment works which includes the amount of investment, risks, and how to obtain the highest returns. Peer-to-peer investments make up a worthwhile high-return generating income. With the tips shared in this article, you’re now more confident to kickstart your P2P investment.