How does P2P lending work?
With peer-to-peer lending, investors can put their money on platforms that lend their money to borrowers. The borrowers repay the loan (P2P loan) with additional interest, which is credited to the lender’s account.
This is a very simplified definition of P2P investing. Each P2P platform has a slightly different structure. Overall, the P2P platform helps connect investors who want to invest their money with people who want to borrow money.
The loans are funded by the amount of investors compared to the traditional facility where banks provide the finance.
How to invest in P2P lending
Investing in P2P lending is generally not difficult. Most P2P lending platforms allow you to set up an investor account in minutes and deposit the funds in a matter of hours. Before doing so, it is a good idea to read up on the risks associated with P2P lending. Detailed information on the P2P risks can be found in the P2P guide from Enqome
.
Apart from being aware of the risks, you should consider the following three points in order to answer the question of whether lending for P2P projects may be of interest to you too.
Define your financial goals
As with any investment, you should understand why you want to invest in P2P lending and the role P2P lending plays within your investment portfolio. Try to find answers to the following questions.
- How long do you want to invest?
- How quickly do you want to access your investment?
- What is your expected return?
- What% of your money do you want to invest in P2P lending?
- Why do you want to invest in P2P lending at all?
This will help define which platform is right for you. Some platforms allow you to withdraw your investments within hours, while others can lock your investment in for several months.
Knowing the answers to the above questions is sure to make your P2P lending strategy clearer.
Assess your individual risk profile
Evaluating your risk profile is one of the most important points – regardless of whether you invest in stocks, ETFs or P2P loans.
Be aware that P2P lending comes with certain risks and that you could lose some or all of your money.
When you invest your money on the P2P platform, you may feel the urge to check your portfolio every day to see if any loans are delayed. After a while you should learn that this is of no use to you. P2P lending is a great way to generate passive income (under normal market conditions) – don’t treat it as day trading.
Loans will be delayed, some may even default. That is why you should also invest in loans secured by real estate or loans that come with a mortgage as collateral.
Choose the right platform
Last but not least, you want to invest in a trustworthy platform that protects your investments and generates the expected returns. There are a few things to look out for when choosing the right P2P platform.
Take a look at the platform’s performance. What is the average interest rate, how many investors are active, how many loans have been funded, etc. The statistics give you a good idea of the platform’s performance.
Diversification opportunities
Some platforms allow you to diversify across multiple countries and credit types, while others are focused on a specific region or credit type.
The more diversification options you have, the lower the risk of credit default. Investors planning to invest a large amount in P2P lending should consider investing on different platforms.
liquidity
If your goal is to invest in home backed loans or business loans, you shouldn’t expect to be able to withdraw your money this quickly. If liquidity is your priority, it tends to make the most sense to look for short-term loans or personal loans on platforms like Mintos, PeerBerry or Robocash.
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