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11 tips to know before starting P2P investing

tips to know before starting P2P investing

Before starting P2P investing, consider these 11 smart tips for minimising your risk and gaining higher returns using a P2P platform.

Investors in peer-to-peer loans boast about getting double-digit returns on their peer-to-peer lending: 10%, 11%, and even 20% on some platforms. 

But of course, there are risks. This guide is written for those wishing to begin investing in loans.

Post summary:

  • What is P2P investing?
  • 11 smart tips for P2P investing

What is P2P investing?

Peer-to-peer lending has seen high-yield-seeking investors flocking to the market as years of unpredictable stock market returns and low savings rates. 

Peer-to-peer lending is where investors make unsecured personal loans to consumers. In return, they are rewarded with average annual returns ranging from 9 to 20%, depending on the platform they use. 

However, P2P lending is risky and contains risks to the original capital. 

Peer-to-peer is a financial transaction without the use of a bank. 

Like banking, peer-to-peer lending offers loans to consumers and businesses with the interest derived from the loans paid out to investors, yet has cut out the bank as the ‘middleman.’ 

Rather than deposit savings into a bank that uses the funds as loans to their customers. Peer-to-peer lending and investing is depositing your money into a P2P platform instead. The platform is then used to offer your funds to consumers as loans.

Usually (although there are other ways to crowdfund), P2P lending is when borrowers apply through peer-to-peer lending websites and complete a loan application stating the following: 

  • the loan amount 
  • the purpose of the loan
  • general credit evaluation of themselves

This information is then made available to prospective investors, who decide which loans to invest.

Investor interest in peer-to-peer lending has rapidly grown. By 2050 the market is expected to be worth one trillion US dollars! 

It’s easy to see why savings accounts offer zero interest in customer funds. Peer-to-peer investing provides high-yield alternatives.

However, with anything offering a higher yield, more risks are involved in your investment. 

How can you minimise the risk to your capital when investing in P2P loans?

11 smart tips for P2P investing

1# Prepare yourself to accept some risk

The P2P investment market is young, and because of this, it is highly volatile. 

Volatility, although it contains some risk, also means there is an opportunity for growth. Even if investors begin by depositing a low amount, they must acknowledge that it has some element of risk, and your capital could be at a potential loss. 

The default risk is the borrower not paying back the money lent if they struggle financially. Most of the risk is minimised under Buyback guarantees and the Guarantee Fund.

If you do not want to have any risk to your capital investment, then investing in peer-to-peer loans is not for you. You have to accept there is some risk if you seek high returns.

2# Comparing P2P platforms

Before you begin investing in peer-to-peer loans, you must select a platform to deposit your funds into and determine which projects to invest in. 

Some platforms are more specialists in individual loan types, while others: 

  • pay higher returns 
  • have introductory bonuses 
  • have BuyBack guarantees and more innovative investing software to make investing easier.

You will also want to know how to withdraw funds and whether there are any fees. What are the project default rates or early exit penalties?

You need to check all the questions before deciding on a platform.

Ensure you use platforms with a track record and have operated for at least three years or more. It is useful to gauge past platform projects’ performance to gauge their success. 

Naturally, past performance offers no guarantee about future yields. However, platforms that have operated for several years mean they have obtained market experience, historically demonstrated returns, and are unlikely to be scam companies. They will also likely have reviews written about them.

3# Do your homework on any P2P scams

With all financial transactions and lending, there are risks. Sadly, peer-to-peer lending has seen a spike in fraudulent attempts to dupe investors and consumers out of their money. 

A P2P lending scam typically occurs when a platform begins to block investors from withdrawing their funds and closes the site. 

Whether the P2P platform was created to defraud investors or closed due to mismanagement and a lack of liquidity is often unknown.

4# Know about P2P loan types

The three main loan types are consumer, business, and property (real estate). 

Business loan lending may have a personal guarantee from the business director(s), making investing more attractive. Property loans are secured on the property, making them more secure, while consumer loans are lent to individuals and are often unsecured.

Investing in all loan types is best to ensure that your risk is spread out. Also, check the payment history of individual loans, including the data held about the borrower. Knowledge is key to obtaining a higher yield if the borrower is trustworthy. 

5# Understand and use secondary markets

Secondary markets are marketplaces on platforms like ours where investors can buy and sell their investments if they wish to exit them. 

If an investor wishes to exit a loan before the withdrawal date is permitted, they can place their share of the loan on sale, and others can buy it or part of it through the platform. 

Examine the loan’s payment history before buying it through the secondary market. Ensure it does not have any arrears or is due to mature soon.

Secondary market loans are a superb way to diversify your portfolio – you freely choose which amount to buy, thus minimising your portfolio risk.

Not all platforms have secondary market features, and some have limitations.

6# Diversify your portfolio

Diversification of your portfolio is a fundamental basis for any financial investing.

Investing low amounts in varying projects is always a sound strategy instead of “putting all your eggs in one basket.”

A diversified P2P portfolio should include a variety of investment projects, for instance, bonds and stocks. If your investment portfolio is secured by real estate, the risk to your capital is even further reduced. 

Secured loans tend to have lower default rates, and the loan recovery process is much smoother than unsecured loans. 

7# Use the AutoInvest feature

To maximise their investing rewards, investors should monitor their P2P accounts and keep the cash held in them to a minimum.

One way to keep cash off the account is to use the AutoIvest feature, which is excellent for decreasing the time needed to keep your investments ticking along.

AutoInvest works well when all the loan types and projects are similar, ensuring volatility levels remain uniform.

A platform with variable loan types with low and high-risk projects means AutoInvest should be switched off and the projects managed manually.

8# Decide between investing in secured/unsecured loans

Consumer loans are mostly unsecured, making them riskier to invest your money in. 

Business loans offer either none or some form of security, meaning some reassurance should the loan default, the capital can be repaid. Some business loans come with personal director guarantees. 

Property and real estate loans usually offer a first or second charge on the property as security, making them less risky.

Usually, it is preferable to have some form of security offered. However, even with property provided as security, there is still a risk that a loan could default. Plus, if the property fails to sell at a price high enough to be sufficient for the full recovery of the loan’s principal.

9# Invest in different markets

A solid strategy for investing in P2P lending is searching for opportunities in other countries. This is made easier if you use P2P software, which makes both quicker and more straightforward. 

Investing in various European markets is a solid strategy to diversify and build a robust portfolio. Plus, loans outside your country could bring higher return rates if the markets are newer.

10# Use platforms that have a BuyBack guarantee

A BuyBack guarantee is an agreement, usually a legal contract, between the loan originator and a lender to protect them against a borrower defaulting on the loans. 

BuyBack guarantees activate if a borrower misses payments for a particular number of days. If this occurs, the loan originator must wholly or partly buy back the loan. 

Buyback guarantees compensate lenders for the remaining principal and some of the interest and penalty fees.

A buyback guarantee does not eliminate risk; it merely minimises it.

11# Start slow, very slow

As with all new financial ventures, newbies should begin slowly as they learn about P2P investing.

Start with smaller amounts, learn where it is easier to make returns and then incrementally increase your deposits. It is even better to reinvest your returns from existing projects into new ones to avoid depositing more funds.

Only when you are confident, then can you accelerate your investing. But for now, begin slowly.

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