Peer to peer (P2P) lending is described as a system of direct loans between a borrower and a lender. A peer to peer lending company manages the direct loans, where a platform in the form of a website to oversee the process. There are various kinds of P2P loan investment opportunities and each has a different risk profile and return.
Nowadays, peer to peer lending platforms can connect individuals who need to borrow money with investors willing to lend. Below are some suggestions you should make before jumping into the P2P lending investment:
Make a research before doing investment
In any new project or investment, the first thing you should do is study the whole plan and makes a research about it. You can start by digging the history of the company you want to invest with. Determine the percentage of loans falls into default, the screening of borrower, average returns, late payments, and more. Not all lending companies are the same. Different lending platforms will have different procedures for screening, late payments, and defaults. Check if the investors of the lending company had success with P2P lending and learn from both their mistakes and their triumphs.
Begin slowly
If you are just starting with investment in lending company, do not be in a rush. Reading and studying are great but first-hand experience is better. You do not need to into the market and loan large amounts of money. You can start by lending small amount and observe the return of investment. In this way, it would give you time to understand your lending platform and prevent yourself from making costly mistakes.
Reinvest your funds
Get more from your portfolio by reinvesting your gains. As borrowers repay their loans, your account grows. When you reach the minimum threshold to invest in a new note, you are often alerted. You can either withdraw the money or reinvest it, allowing the income to be put back to work. This can help you improve your returns overall, and build your portfolio at a rapid rate. Take advantage of the compounding yields to be gained by continual reinvestment of returns into new loans.
Be involved always
P2P lending market is growing and evolving all the time. it is recommended to be updated with developments within the industry. Acquaint yourself with new platforms as they emerge, changes to legislation and about the loans themselves. Remember that peer to peer lending is not a passive exercise. You need to put the time in, in order to get anything out.
Find out your risk tolerance
Higher risk tends to equate to higher reward. However, if you are not comfortable with that level of risk, choose a risk profile that fits your tolerance better. Carefully choose the much risk you are prepared to take, and only invest accordingly.
Diversify your funds
Diversification defines as distributing your funds across as many loans as possible to prevent loss in case of default. The process will help your returns to stay positive and remain close to the expected rate because you do not need to depend on just one loan. The more diversified you are, the more protected your investment. It is recommended to spread the risk by making sure that you do not lend over one percent of your portfolio into single business.
Observe the platform risks
P2P platforms are start-ups and could also fail. Investors could lose their money held at the platform. One way to reduce such risk is to use a platform with a third party escrow agent. Another way is to reduce the idle money on the platform’s account. Transfer them back to your bank account. Lenders can also politely ask the platforms to show proofs that they have sufficient money to run for another one to two years.