Most people never do anything with their money other than earning it, putting it into a bank account, and spending it. Perhaps you have some friends who talk about investing, but it’s always seemed a bit overwhelming or over your head. Investing may seem daunting to those without experience, but there are some options for those who want to dip their toes into the investing waters. Investing in peer-to-peer lending (P2P lending) is becoming increasingly popular, as it’s much less complicated than traditional investment methods and it’s a lot easier to get started.
Below, we’ve outlined some tips for those new to the world of P2P lending. But first, we’ll briefly explain how P2P lending works (for those new to the sector). If you’ve read our blog posts before and are familiar with how P2P lending works, you might still learn something new.
P2P lending in a nutshell
Peer-to-peer lending, abbreviated as P2P lending and often referred to as crowdfunding, is a system that matches people looking to borrow money—borrowers—to people looking to invest and earn more on their money—lenders or investors. Companies (like Bondora) offer their services to match borrowers with investors online, which allows for lower overhead and makes operations much cheaper than traditional financial institutions (such as banks). This allows for higher returns for investors and lower interest rates for borrowers. Of course, there’s always risk involved as borrowers can default on the loans (aka stop making payments).
So basically, it boils down to borrowers having quick access to the loans they need while investors are able to generate a fair profit or more income from the interest paid by said borrowers.
Now that you have an idea as to how it works, let’s get to some simple tips to help you get started.
Research P2P lending platforms
Before you start investing, it’s important to do your due diligence and research the various P2P lending platforms available. No two P2P platforms are the same, and it’s recommended to start with one that has a solid track record. Not to say you shouldn’t try something new (especially in today’s world of successful startups), but—when you’re just entering the P2P lending world—it’s recommended to start with a platform that’s tried and true. So what should new investors look for in a P2P lending platform?
- As stated, look for a platform with a solid track record. Chances are if it’s been around a while, it’s doing something right. It also has had plenty of time to work out any kinks and growing pains, which means it hopefully delivers a fairly seamless user experience.
- A trustworthy platform should be able to provide data and show their average returns from past investors, the average loan default rate, how they screen borrowers, and their process for handling late payments.
- Look for a platform with a dedicated help center that highlights it’s customer support. If there’s a dedicated team for investor relations and customer support, even better. When you’re a beginner and dealing with money, it’s always frustrating when you have a problem and need help but can’t seem to connect with someone to help you solve it. If you can’t find any information about customer support on a platform’s website, that’s not a good sign (especially for beginners).
- Look to influencers in the P2P investing sphere and see what they have to say. Not only should the industry’s heavy hitters have good things to say about a platform, but they should be able to speak to their own personal experience using the platform and provide examples and data to match.
- Look for a platform that has different options for different levels of investing. When you just start out, perhaps you want more automated features, but as you learn you may want to advance to a more manual and customized strategy.
Understand the mechanics of P2P lending
Not only should you understand the general nuances P2P lending, but you should make sure you fully understand the mechanics of how your chosen platform(s) work(s). It’s okay to start slow—no need to rush and invest a huge sum of money before you understand how everything works.
Ideally, you have chosen a P2P platform that doesn’t require a significant minimum investment amount—which means you don’t have to make a huge commitment (which then subsequently means you can avoid making any costly mistakes). You also should think about how hands-on you want to be with your investments. Do you want to be able to do everything manually? Would you rather take advantage of automated features and have the platform do some or most of the work for you?
Consider these questions when choosing an initial P2P platform.
Take advantage of P2P automation
Speaking of automation, we recommend taking advantage of any automated tools or available automated investment options when you first start to invest. This way, you can still get hands-on P2P lending experience and learn whilst letting the platform do most of the heavy lifting. When you think you’re getting more comfortable with how things work and start to develop your investment strategy, you can start to invest with more of the manual customization options (if you so choose).
That said, many people like to stick with the easier automated options and have it serve as a passive income of sorts, whether they’re busy with more intricate investments (stocks, bonds, etc.) or just want to keep things simple.
Understand the risk involved with P2P lending
As with any investment (not just P2P lending), your capital is at risk. It’s important to fully understand the associated risks of investing with P2P lending, but it’s just as important for you to determine how much risk you’re willing—or can afford—to take. Make sure you have a strategy in place—it’s never a bad idea to have an emergency fund set aside, either.
Diversify your P2P investments
To help mitigate risks, it’s always recommended to diversify your investments. You’d be hard-pressed to find a financial advisor who doesn’t stress the importance of a diversified portfolio. This means you should spread your investment money across several different types of investments. That way, if one investment performs poorly, your risk is moderated.
However, it’s important to remember to diversify between asset classes across different industries where their performance isn’t highly correlated (i.e., don’t just spread your money across different cryptocurrencies, because if new regulations are put into place, they would all be affected). The same can be said for investing in P2P lending—spread your money across various types of loans with various risk assessments. That way, if a loan defaults you’ll still have all of the others to make up for the loss.
Investing in P2P lending is quite simple and straightforward, and can be very rewarding as long as you take the right precautions and educate yourself on the subject matter. Do your homework and learn from other’s experiences (and pay attention to their mistakes) to inform your own decisions. There’s a plethora of knowledge out there with tips and tricks—tap into it, and then start investing and develop your own strategy. Keep track of your progress, for you never know who could benefit from your experiences—pay it forward!
What are some of the best P2P investing tips you’ve come across? Let us know in the comments.