Tips for Peer to Peer Lending
Peer to peer lending is an online marketplace for ordinary individuals to offer unsecured personal loans. For instance, John has extra $20,000 that he wants to invest.
He desires an alternative to real estate and stocks, so he decides to become a peer-to-peer lender.
At the same time, Bob from the opposite street of John needs $20,000 extra to substitute his leaking rooftop. He may not get home equity loan from a bank; therefore, the P2P marketplace can be a good choice for Bob.
These two parties can facilitate peer to peer lending. If you want to get a loan via P2P lending or want to become a lender, here are a few tips for your assistance.
Research Before Investing
If you want to lend P2P, you have to study the history of a lending company that you want to work with. You have to ask a few questions:
- Percentage of P2P loans into default
- Procedure to evaluate and screen borrowers
- Average returns for an investor as per records
- Procedure for handling any late payment
Study the investment history of the company before investing money. Keep it in mind that every lending program has different practice to lend money and deal with borrowers.
Every lending platform follows different processes for late payment, defaults, and screening. See the success stories of successful investors with peer to peer lending.
If you are new to P2P lending, make sure to start slowly and consider it as a good investment tool. Research and reading can be a good choice, but the first-hand experience can be the best teacher for you.
You can lend small amount at an initial level, such as $20 per loan. By investing small amount at the start, you will get sufficient time to understand this lending platform and avoid costly mistakes.
If you invest too much money too soon before understanding the mechanics of peer to peer lending, you will feel overwhelmed. You should understand this new loan before investment.
Understand Your Risk Tolerance
The comfortable risk level of every person is different; therefore, you have to understand your risk tolerance before you start investing.
Keep it in mind that all investments have some risk levels. Sometimes, the risk can be higher than reward. Lending to any low-grade borrower can be riskier than lending to a high-grade debtor. Carefully think about the risk that you can bear without any trouble.
Keep it in mind that you can lose your whole money just because of a wrong investment.
Diversity Peer to Peer Lending
Diversification is necessary to decrease the default risk and protect your peer to peer investment. If you have $5,000 notes, you can start with $25 – $50 per lending.
Try to diversify your money across hundreds and thousands of loans. With this diversification, you can earn a higher profit.
Reinvestment of Returns
There is no need to cash out P2P return after earning it.
You can get the advantage of compound yields by reinvesting your profit into new lends.
Alternatively, it will be good to use P2P returns to guarantee a return and repay your own loans like your student loan or mortgage.