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P2P lending is a realm of its own and although it is relatively new, the many platforms available to invest in and the different forms of this kind of online investment can be confusing for beginners. Even if you already invest in a traditional way. So here you will find useful tips to get started investing in P2P.
Firstly, let’s start with definitions.
What is P2P lending?
Peer-to-peer lending (P2P) is a way for people to lend money to individuals or businesses. You – as the lender – receive interest and you get your money back when the loan is repaid. This is made through online platforms, like the ones we review on P2Plending.net.
As the lending process has no intermediaries, peer-to-peer lending is more lucrative for both borrowers and lenders, than traditional lending processes. Lenders get better interest rates, and the borrowers get the loans faster and without the myriad of paperwork and collaterals usually required.
P2P or Crowdfunding?
P2P and Crowdfunding are often used interchangeably and it is easy to create confusion. Are they the same thing? The answer is yes and no. They both involve a crowd, or different people, coming together to provide financial support for a purpose in the form of a loan. But they are quite different.
Crowdfunding and specifically equity crowdfunding is, in fact, a way to get funding for a project like business development or a building construction by having people acquiring a stake in the business.
P2P lending, on the other hand, allows for investors’ money to be matched, via an online platform, to a loan for a person or business. A loan is very different to equity: it’s a specific amount of money, repaid over a defined term, and investors earn a return via interest payable on the loan.
Now that you have a clear idea of the basic terms let’s get started with the best tips to start investing in P2P lending!
Tip #1 – Evaluate the risks carefully
The P2P investment market is young and relatively new. Although it is not a scam but a legit way to invest money online starting with a low amount, it is important to understand the risks. Your capital is at a potential loss. This could be the result of different situations, but there is one principle to understand.
The default risk. This is the risk that any loan carries by definition. And that is the chance that the borrower will not pay back the money lent.
So, do your research. Select your platforms wisely by reading reviews and opinions. Check and follow your investments, even the ones in Auto-invest mode. Look for and analyze the statistics and information available on each platform to make informed decisions.
If very little or no information is freely available on the platform you are reviewing, consider it a big red flag!
Tip #2 – Platform comparison is key
Although start investing is the first thing to do to start earning some interest do not rush into any single platform. Research, research, research.
Our website provides a good list of the most popular P2P lending sites to know about, so take advantage of the experience of others and compare platforms. If you want to make the most of your savings, you need to be in control and choosing the best options for you. You may want to invest in real estate, or you may want to invest in business loans. Maybe you also want to invest in consumer loans. High returns or security? Are there early exit options? What about a BuyBack guarantee? What is the default rate? These and more, are all questions you need to ask yourself before choosing a platform.
Tip #3 – Take advantage of bonuses
Maximising your income comes in various forms. Many leading platforms offer sing-up bonuses and referral programs to increase the number of users. This, in turn, is an advantage for you to make the most of what you are investing in these platforms.
They are either fixed amounts or a % of the amount invested (typically 0.5-1%). They can be a good way of boosting returns early on. Our ‘sign up bonuses’ page has all of the latest offers available from the platforms we monitor.
Tip #4 – Get to know the secondary markets
Secondary markets are marketplaces on platforms like Estateguru or Mintos where investors buy and sell their investments. The way they work is that if you want to exit a loan early, you can put it up for sale and other investors can buy your share in a loan. Each market place differs from platform to platform. Some allow you to freely chose the amount and some have limitations. Some platforms do not have a secondary market at all.
The main benefit of a secondary market is the fact that it is a good way to create a diversified portfolio quickly.
There are times when platforms have limited availability of new loans (the ‘primary market’). So, the secondary markets provide liquidity to investors needing to raise cash.
Always look at the payment history of a loan before purchasing it. Avoid loans that have been frequently in arrears in the past. Stay away from loans near to the maturity date – sellers may have doubts about the ability of the borrower to repay.
Tip #5 – Diversification including secured loans
Diversification is one of the basics of investments. It is better to invest low amounts in different projects rather than a large amount in a single one. As the old saying goes: “don’t put all your eggs in one basket”.
A diversified P2P portfolio is a key to success and it should include a variety of investments. However, if the majority of loans held within your P2P investment portfolio are secured by real estate or other hard assets, your chances of reducing risk are higher. Secured loans, in fact, have more stable returns across the economic cycle than unsecured loans. This is because they tend to have lower rates of default and the recovery process is a lot more favourable.
Tip #6 – Keep control of your investments
To maximise returns, investors should monitor each P2P account to ensure that investment returns are in line with expectations, cash held on the account is kept to a minimum, and the interest rates are competitive relative to other opportunities elsewhere.
Using Auto-Invest is great to decrease effort and time put into lending online, which ultimately is thought to be easy and fast. However, auto-invest should be used selectively. For example, platforms, where all the loans available are similar, are great to use Auto-invest. However, if the platform offers different kinds of loans and there are few advantages from manual selection, avoid using it. Additionally, it is important to set a minimum interest rate and set it at a level close to current interest rates available. Other metrics such as loan status and risk grade should also be selected carefully.
Tip #7 – Geographical diversification
Yes, it’s a mouthful. And also quite an intimidating term. However, it is one of the best strategies in investing on P2P lending. Simply put, try to invest in opportunities in different countries. This is one of the best things that P2P lending platforms allow you to do that is not as easily done with traditional ways of investing. Although different platforms have different identification requirements, having the possibility to invest in different markets across Europe is a great strategy to build a good portfolio. Loans outside your home country can also bring higher return rates, which is definitely a big pro! However, consider the costs of currency exchange if you invest in opportunities with a different currency.
Tip #8 – Considering liquidity
Investing means using up your savings to build a return based on credit interest. A good strategy is to invest and re-invest to increase your yields. A substantial difference that P2P lending offers from traditional lending is how liquid it is. Thanks to secondary markets and other early options that differ from platform to platform, investors are given the possibility to withdraw their funds, exit a loan before the end of term or even sell it back to the platform. However, the way in which an investor manages liquidity differs from investing strategy and most importantly, different platforms may or may not offer secondary markets.
Ultimately, no one can predict whether these markets will continue to be liquid during the next financial crisis. So, consider secondary a tool to rebalance your portfolio, sell loans that are not performing as expected, or to capture profits for loans with high demand.
Tip #9 – Keep ahead of the game
P2P investing is by definition a fast environment. The majority of platforms offer new opportunities to invest in daily and as P2P becomes more popular, so competition rises. In fact, some of the most attractive loans are taken up very quickly by investors. Be one of those investors by keeping up to date, checking on the platform and being active with your investments. Don’t stay out of the loop if you really want to achieve high returns. Treating P2P lending a hobby is an option, but don’t expect the best of results.
In particular, take advantage of pre-orders. The most compelling opportunities are often pre-announced and available to selected members. Some platforms follow a first come first principle, while others perform a selective allocation. Investing in these popular loans can be frustrating and take up time. However, the returns that these loans can generate will be worth the effort to most investors.
Tip #10 – Take losses into account and look at the long term
Believing that P2P lending will bring only high returns is a little unrealistic. So take them into account and make sure you invest amounts that you can comfortably absorb. Your portfolio is the tool you need to curate to increase your returns and minimize the exposure to risk, by investing in different opportunities and by having assets to cover for losses. For example, do not invest only in high return opportunities, as those usually carry a higher risk.
Moreover, investing only in short loans (1 month or less) is not advisable as it exposes you to the risk of re-investment. That is when you want to re-invest your available funds but no opportunities are available. This risk should be avoided by locking in a few long term returns for the future when more investors will compete to purchase loans.