Five ways to reduce risk in p2p lending
For years now, peer-to-peer lending sites have provided a great way through which investors can diversify their investments and make good returns. Some of the P2P lending sites have interest rates that go as high as 28%, which can be pretty rewarding if a good amount of money is invested. Due to the immense benefits that P2P has brought into the investment world, it has greatly gained popularity.
What you need to understand as an investor is that just like any other investment such as cryptocurrency, peer-to-peer lending also has some risks. The good news is that there are ways through which you can minimize risks in P2P lending. The following are five ways through which that can be done.
Diversify Your Funds
Diversification is essential for an investor. When investing in peer-to-peer lending sites, ensure that your amount is invested in different types of loans. The good thing is that most P2P lending sites offer hundreds of loan types that you can invest in. However, you should exercise great caution when selecting loans to invest in. Different loans have different interest rates and risk rating. Most P2P sites like FinBee show the risk rating of each loan.
Advancement in technology has brought in an auto-invest tool that’s found in most peer-to-peer lending sites. An auto investing tool helps with making investment decisions on your behalf and ensures that the investments are adequately diversified. It is important to note that you have to set the criteria which your tool will use to invest; this can be based on the interest rate of the loans, location of projects, loan duration, and loan types. An auto-invest tool also helps to prevent money drag since all the funds in your account are immediately reinvested after payment has been made.
Apart from diversifying on different loans, you can also diversify your investments across different peer-to-peer lending sites. Different P2P sites have different rates and security measures to protect investors. If one P2P site went under, your investments made on other platforms could help you recover the lost amount. If you had only invested in one P2P site and it went under, the risk of losing your investments will be very high.
Invest what you can recover if lost
When making investment decisions, be it P2P loans or the acquisition of bonds, never invest all your finances. Ensure that the portion which you are investing can be easily recovered if it was lost in the investment.
The amount of money that you invest in P2P loans should be determined by your financial ability, and the risk on loan. When beginning the investment journey, have a definite amount that you are comfortable investing and only add more money if you get returns or if your financial ability improves through any other means.
Most investors get carried away by the high-interest rates on the loans listed on peer-to-peer lending sites, and they end up making bad investment decisions. Study a given loan properly before investing in it.
Also, have in place a good investment plan that has clear goals. This will help you to stay on track with your investment and will prevent you from making bad choices.
Invest in a platform that secures investments
Peer-to-peer lending sites list a wide variety of loans. Some of them are usually secured with collateral, while some are not. You should invest in investments that have security if there’s an option to do so. By carrying out a proper study of the different P2P lending sites available, you will be able to find one that secures the loans that you desire to invest in.
It is important to note that regardless of what precautions you take, you cannot control whether the borrower pays or not. To avoid losing your investment because of such scenarios, only invest in those platforms that will help you recover your investments.
Verify the sites default rate and creditworthiness of the borrower
If you want to reduce the risks on your investment, invest in a peer-to-peer lending site that has a zero-default rate. This means that they have not experienced any payment defaults in the time they have been operational. If a p2p site does not make its default rate known, take that as a red flag and find one that’s transparent enough.
All peer-to-peer lending sites carry out due diligence on borrowers before listing them, which helps to mitigate risks. When making an investment decision, ensure that you go through all the details that pertain to that borrower. You can easily determine the borrower’s ability to repay the loan by carefully assessing the details provided by P2P sites.
Understand the Platform
Acquainting yourself with the P2P platform is of great importance. Different platforms have different operating models and what you might be used to may not apply to your new P2P investment platform.
Understand how deposits are made into the accounts, how you can withdraw your money. What features does the platform have and how do they affect how investments are made on the platform? You should also understand how the loans on the platform operate so that you do not end up investing in the wrong investment loans.
The thing is, before you trust a lending site with your money, ensure that you understand how the money is going to be invested. If you need further clarification about a given loan on a peer-to-peer lending site, do not hesitate to contact the platform’s customer support team. You can only mitigate what you have an understanding of. That said, understanding the possible risks in a lending site is a crucial factor in reducing the risk.
Risks in this industry should not scare you from investing. Peer-to-peer lending has great potential, and we are yet to witness it at its peak. With the tips discussed above, you can avert most of the risks and enjoy better returns on your investments. You can always seek the help of a professional financial advisor before investing if need be.