Peer-to-peer (P2P) lending has emerged as an innovative way for individuals to borrow and lend money directly through online platforms. It offers investors an opportunity to earn attractive returns by funding loans requested by individual applicants. However, like any investment, lending through P2P requires a thoughtful strategy to ensure stable earnings while minimising risk.
This article outlines some of the key P2P lending tips followed by successful P2P loan providers to build a profitable lending portfolio. Just as institutional investors have structured processes for deploying capital, adopting prudent peer-to-peer lending investment practices greatly improves profitability for individual lenders over time.
Best Techniques for Investing in Peer-to-Peer Lending
Here are some of the top peer-to-peer Lending Investment strategies that will help you invest and give the best returns:
1. Diversify Investments
It is important to diversify your successful P2P lending portfolio across many applicants to minimise risk. Rather than placing all your funds with one or two applicants, lend small amounts to multiple borrowers across risk categories, locations, professions etc. This approach ensures that the default of a single borrower does not jeopardise the overall stability of your investment portfolio.
2. Evaluate Applicants
Carefully vet each applicant's financial and credit profile before lending money. Review factors like income stability, debt levels, credit score, repayment history on loans, employment standing, etc., to help gauge their ability to repay. Avoid lending based on emotional reasons. An objective evaluation of borrowers helps in minimising the allocation of funds to high-risk applicants.
3. Understand Risk Tiers
Not all applicants carry the same level of risk. Salaried employees generally have a lower risk than freelancers or new entrepreneurs. However, the latter may provide higher returns. Understand these risk classifications and decide what percentage of your funds to allocate to each tier based on your risk appetite.
4. Reinvest Repayments
Consider reinvesting applicants' repayments into new loans instead of withdrawing the funds. This allows you to compound your returns. However, do not just reinvest blindly. Review your portfolio periodically before putting repaid money into new loans to ensure alignment with your overall peer lending investment strategy.
5. Monitor Portfolio
Maintain regular oversight of all borrowers' repayments and the overall health of the portfolio through a systematic monitoring process, preferably on a monthly basis. Look for late payments, defaults, or other issues indicating problems. Portfolio tracking allows you to take quick action when required and also gives insights into which segments are performing well to inform future lending decisions.
6. Choose the Right Platform
Carefully research and select a reputable P2P lending platform that aligns with your investment objectives and risk tolerance. Analyse factors like the platforms’ operating history, transparency, due diligence processes, security measures, fees, loan performance data, and regulatory compliance. Choosing the right platform sets the foundation for the success of your P2P lending pursuits. Reputable platforms vet applicants thoroughly and report portfolio metrics accurately.
7. Set Aside an Emergency Fund
Prior to allocating all surplus capital to P2P lending, it is advisable to establish an emergency cash reserve equivalent to three to six months of living expenses This will prevent you from overcommitting to P2P loans or needing to liquidate them prematurely to meet urgent cash needs. Emergency funds provide a financial cushion and lend stability to your P2P portfolio.
8. Automate Investing
Most peer-to-peer lending platforms let you set simple rules (such as credit score, income, or loan purpose) to enable automated investing. This way, funds are automatically invested in loans that fit your requirements. Also, automation helps you manage your P2P portfolio easily and diversify across different lending institutions without missing opportunities. This means your money is deployed quickly, helping you diversify and capture the right opportunities without manually reviewing every loan listing.
9. Build Gradually
Rather than putting a large sum into P2P lending instantly, start small and build your portfolio gradually over time. Begin with smaller investment amounts to focus on understanding the basics of lending, evaluating applicants' risk, and monitoring repayments effectively first. Once you gain sufficient experience, you may increase your investment amounts in accordance with your risk tolerance. A gradual escalation of investments facilitates prudent risk management.
Conclusion
Peer-to-peer Lending Investment can be financially rewarding but carries certain risks that need active management through innovative strategies. It should be viewed as a long-term investment for patient lenders rather than a get-rich-quick scheme. Setting realistic return expectations and continuously updating your knowledge of this evolving space are essential.
While defaults or late payments may occasionally occur, lenders can generate relatively stable returns by intelligently diversifying, diligently evaluating applicants, tracking performance routinely, and wisely reinvesting repayments. In time, your portfolio will likely become larger and more resilient. With the right strategic approach, P2P lending can become a fruitful component within a broader investment portfolio.
Shriram Finance provides valuable insights on alternative financing and fundraising methods for small businesses and individuals, which can complement an investor’s broader financial strategy.
