Learn More About Investing In Peer To Peer Lending
What is peer to peer lending
Peer to peer lending, otherwise known as p2p lending, is a system that connects lenders and borrowers by eliminating middlemen like banks. This type of lending is mainly done online, and those sites that facilitate it have significantly increased in number as most individuals and businesses adopt it as a way to get financing.
The first peer to peer lending platform, known as prosper, was established in 2005. Since then, thousands of peer to peer lending platforms have sprouted up across the globe.
How does peer to peer lending works?
Peer to peer lending platforms work by connecting investors to borrowers. It is the site that sets the interest rates and terms of the loans (however, there are those sites that give lenders the power to determine rates). It is important to note that you will notice different rates on loans within a single site. This is brought about by a difference in the risk associated with the loan and even the loan term.
The peer to peer lending process begins with the opening of an account on sites like Mintos, Estateguru, Finbee, Grupeer & Bondora . After successfully registering, the investor then deposits some money in the account which is used to invest in the different loans available. Peer to peer lending platforms have different minimum amounts that an investor can invest, be sure of the minimum amount you require to invest before you deposit funds.
On the other side, a loan applicant submits their loan request to the peer to peer lending platform. The application is evaluated by a team of experts in the peer to peer platform before it is published on the site. The peer to peer platform also assigns the interest rate and categorizes the loan into a risk category, depending on the rating process followed by the site.
It is essential to point out that the investment process can be automatically carried out with the help of an auto-invest tool.
Benefits of peer to peer lending investing
Before you make any investment decision, it is always important to have an understanding of the benefits that you are going to enjoy from your choice. By investing in peer to peer lending platforms, these are the benefits that you will enjoy.
Higher rate of returns
Peer to peer lending have higher returns compared to conventional banking systems. Generally, the rate of return on the most platform is about 13%. The P2P sites can achieve such rates or yields because they have lower overhead costs, and set the interest rates on their own.
Regular source of income
Several peer to peer lending sites make monthly payments to investors. This ensures that you have a steady source of income every other month until the loan term ends.
It requires a small capital to start
P2P lending platforms only need a small amount for one to invest in the loans published on their sites. Some sites allow investments of as low as 5 euros. With an investment of around 1000 euros, you can easily diversify your portfolio to tens of investment loans.
It is easy and fast to invest or borrow
Investors and borrowers can easily register accounts with the lending sites and transact within the dame day. This is not the case with banks where there is a lot of paperwork and bottleneck requirements that make it almost impossible to get a loan.
Nonetheless, peer to peer lending sites also have some disadvantages that are worth noting.
- Credit risk – the loans offered on peer to peer platforms are usually exposed to high credit risks. A good number of borrowers for funding from peer to peer platforms are those that have poor credit scores and cannot get financing from banks and other regulated financial bodies.
- No regulation – not all peer to peer lending platforms are regulated by the government. As a result, if a site scams the investors, it would be nearly impossible to track it and recover the investor’s assets.
What risks are associated with peer to peer lending platforms?
Upon the completion of a loan term, investors reinvest their money into other loans on the platforms they are using. To make the reinvesting cycle more effective, an investor should use the auto-invest tool which automatically invests into other investments once a loan is paid off.
A money drag risk occurs when a loan that you had invested in finishes its term, and when payments are made, the money is left uninvested. The funds will be lying in your account without getting any returns.
When lending out money, there is always the risk that the person receiving the money may fail to pay. A borrower can default before you receive the entire loan back. Some platforms will help you recover such money, but the risk of losing the money is still there.
Loan originator bankruptcy
It is important to note that some peer to peer lending platforms offer loans that have been funded by other lenders while some vet and fund the loans themselves. If your site works with external loan originators, then you are prone to the risk of such originators going bankrupt. Some loan originators may even decide to default payments which will force you to take legal action to get your money back.
This is one of the most serious risks that are associated with peer to peer lending platforms. Unlike the loan originator bankruptcy where your peer to peer platform team can help you recover the money, a platform bankruptcy is most likely going to lead to a loss of all your investments. However, there are some peer lending platforms like Bulkestate that separate their accounts with those holding investor’s funds, so that in the case the platform goes bankrupt, the investors’ money is still safe.
Thousands of businesses and individuals have benefited from the crowdfunding sites. Crowdlending remains to be a great source of finance for project developers, companies and individuals while ensuring that investors get a hassle-free income from the money that they lend.
It is advisable to always carry out a thorough research about a given peer to peer lending site before investing in it. Understanding a peer to peer lending platform is the first step in making a god investment decision. You can go through the reviews on different peer to peer platforms, that we have compiled for you to understand how each peer to peer lending platform operates.
How to get started in peer to lending lending
Surviving in this modern society requires one to have a sharp mind. Employment is no longer enough to lead to a comfortable lifestyle, and even in some places, it is not possible to get an employment opportunity. On the bright side, there are several other ways through which one can make money aside from getting a job. You can either invest in cryptocurrencies, bonds, and shares or the peer to peer lending platforms.
If you want your money to work for you, then investing in peer to peer platforms is the way to go. P2P lending sites create a platform where you can lend your money to borrowers at a fee hence making profits. If you are deliberating on investing in peer-to-peer lending, then you have to have some understanding of the system. This article provides a definite path that will commence your journey into peer-to-peer lending, in a smooth manner.
What should you do when getting into peer to peer lending?
Have clear goals
When making any investment decision, it is always essential to have a clear goal. The goal should help you to determine the number of funds that you are going to invest and act as your roadmap throughout your investment journey.
First and most important, allocate a certain figure that will go into the investment. The amount should not be huge when starting to mitigate the risks associated with peer to peer lending. With time, you can inject more funds into your investment portfolios. The additional amount can come from the returns that you earn.
Also, have a clear picture of how much you want to earn in a month. This will help you to determine the type of loans to invest in that will give you the returns you desire.
Chose a peer to peer lending platform
Once you have a clear set of goals, you can now proceed into selecting a peer to peer lending platform. It is advisable to have several options and then narrow down to one platform. When choosing a platform to invest in, consider these factors;
- Loan options available– a good peer to peer lending site should have a large number of loans that you can invest in. This helps with diversifying your investments which is critical in mitigating risks.
- Buyback guarantee – a buyback guarantee protects your investments if the borrower defaults payments. You should invest in a site that offers loans that have buyback guarantees so that if the borrower defaults, the site can buy back the loan shares from you and you receive your investment back. It is important to note that different peer to peer platforms have different terms when it comes to buyback guarantees, study each to understand what terms it has.
- How long the company has been operational- peer-to-peer lending sites that have been in the industry for long have the expertise to handle different loan investments in the right manner, and have a better foundation to avert risks on their platforms. However, it is important to note that there are new peer to peer platform that are performing relatively well compared to old sites.
- Transparency and track record of the company- experience alone is not enough to warrant a peer-to-peer lending site a good investment choice. A good peer to peer lending platform will be transparent on all details and will be ready to share their track record with you. Avoid working with an opaque working company.
- The average rate of returns- the higher the rate, the more the revenue that you will earn. However, you should understand that those loans that have high-interest rates usually have a higher risk.
- Finally, work with a platform that’s well known and has good reviews on sites such as Trustpilot. The peer to peer lending platform should also be able to give proper customer support.
Invest in Your First Loan
Once you have a peer-to-peer platform to invest in, now focus on your investment. Deposit some money to your peer to peer lending platform and filter through the available loans to determine which loan is the best fit for your investment.
When making your first investment, remember to invest with the least amount possible and ensure that the investment is diversified. This way, you will be able to know which loans perform better compared to others, and the next time you will be investing, you can invest more on the better-performing loans.
Once you have manually selected your first investments, you can now make the entire investment process automated. Going into the autopilot mode will relieve you from having to check your investment portfolio now and then to make new investments. The auto investing tool will select new loans to invest in, all you have to do is set the filters, and the tool will invest according to the set filters.
It is important to note that the auto-invest tool used on different platform are not the same. You have to understand what each filter means for you to be able to create an effective auto-invest strategy.
Monitor your investment progress
Monitoring your investment progress is not meant to increase your returns, but it is equally important. By monitoring your investment, you will be able to find out if the investment strategy you put in place is working or not. You can therefore make suitable adjustments that will make the strategy more effective.
You can set aside time to monitor your peer to peer lending accounts, let’s say once or twice a month. By monitoring your progress, you will also be able to determine whether you are achieving the goals that you had set or not.
The peer-to-peer industry is quite extensive, the number of loans and investment opportunities is significantly high, and you cannot miss a suitable investment option to start on. It is important to remember that peer to peer investing will not be a walk in the park. There are days that you might not make any profits, and in terrible days, you may even lose your investments.
As a good investor, strive to make the right investment decisions, and you will enjoy high returns.