Peer-to-Peer Lending Tips
- Apr 10, 2016
- 3 min read
It is fair to say that the Peer-to-Peer lending industry is having a stellar year and a promising future. So how can you take part and profit from the p2p lending boom?
As a borrower, you have nothing to lose. You can see if you will be approved, and your interest rate. Most importantly, you are receiving all of the same consumer protections as if you were borrowing from a bank.
But, if you are thinking about investing in a platform, you need to do your homework. Here are the things you need to know:
1. Choose the right platform or you could lose everything.
By providing financing for loans, you are taking a speculative bet. Unlike depositing your money with a bank, you have no insurance. And, if a platform goes bankrupt, you stand in line behind every other creditor. The loans are not “carved out.” So, you are not only taking credit risk for the individual borrowers, but you are also taking credit risk for the platforms themselves.
To protect yourself take a good look at the track record of the platform in managing credit risk. How long have they been doing it for? Have they been through a credit cycle and if so what happened? If they publish expected losses how well have they done against them?
Talk to the executive team. Ask them what regulatory vehicles they are using to be keep their offerings compliant. Ask them how their offerings are bankruptcy remote so you don't have to worry about a failed project cascading and dragging down yours.
2. Ask 'what am I really investing in'?
Many platforms are not much more than black boxes. If you don't have a clear understanding of exactly who it is you are lending money to, and there is no real transparency concerning the underlying loan, then you should be asking yourself whether it is a worthwhile investment.
3. Do due diligence
Don't cut corners on the due diligence. Take a look at the business model of the borrower and try and match your risk/reward profile to it. Look for someone who has a real plan for the money and a real plan for paying it back.
No matter how good the historical track record, or secure the collateral, every investment carries a risk of losing some or all of the money you contribute. Check all the documentation and data you can find. If you have a question on any aspect of the investment, don't participate until that question is answered to your satisfaction. If you have trouble getting a response to your questions, that's a big red flag.
4. Look at what the security is for the loan.
If the economy turns sour, or the borrower has trouble repaying the loan, is there security that can be sold to pay back your investment? If not, then you should be asking yourself whether it is a worthwhile investment.
5. Start slow
Get a first hand experience of the marketplace with small amounts. Take your time to understand the marketplace mechanics well before investing larger amounts.
6. Diversify to minimise risk
This is simple, of course you don’t want all your financial eggs in one basket! So just as every financial advisor on the globe will tell you a fully diversified portfolio regarding your asset classes is essential, it is also true within your lending platform.
7. Re-invest to maximise returns
Make sure your money is reinvested as quickly as possible at the rates you are happy with. When your money is sitting idle within these platforms it will lower your return on investment you will lose potential income from your p2P loans.
8. Remember cashing out takes time
Liquidity is still pretty limited, so do not invest any money you may need in the next few months
If you are fairly new to P2P loans and borrowing, I'm sure you will benefit greatly from the depth of knowledge shared by our experts here.
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