Lending money to friends or family is not a new thing. People have been lending and borrowing money from each other since the beginning of mankind. However, in the last decade peer to peer lending has become the mainstream of borrowing among the people of the UK. In this type of lending, individual investors invest their money through online p2p platforms and lend to those who are in need of money. Investors can earn high returns on their investment with peer to peer lending, while borrowers can find loans at low rates compared to traditional bank loans.
You may want to become a p2p investor that can get high return rates, but you should keep in mind the following tips to get the most out of this asset class.
Research Before Investing
There are several peer to peer platforms present in the UK, so it can be challenging to choose the right platform. You must study the loan history of the platform before making any final decision. Moreover, you should ask some questions such as the percentage of default loans, the evaluation process the platform uses for the borrowers, the average returns of the lenders in the past and the processes of repayment management. Take time and do not rush when studying the investment history and track record of the platform.
It is essential to keep in mind that all the platforms operate in different ways and have different processes for screening, defaults and late repayments. To get more information, you can talk to the investors who have had success with p2p lending to learn from their mistakes and triumphs. You can also take lending tips from online websites where investors share their experience with p2p lending.
Start From Small Amount
If you are new to p2p lending and want to make it your investment tool, you must start slow. No matter if you have already read a lot about it, you can not learn without practical experience because there is no better teacher than first-hand experience.
Do not think that you should invest a huge sum of money, rush into the market and lend large amounts of money. P2p platforms allow you to lend smaller amounts, so you should take advantage of this opportunity. By investing little money at the start, you can get a chance to understand your p2p platform and avoid costly mistakes. If you invest all of your capital at the beginning, you may end up losing all your money.
Understand Your Risk Tolerance
It is true that everyone has a different level of risk with which they are comfortable. So you should know how much risk you can afford before investing your money. In p2p lending, the higher the risk, the higher will be the reward. If you lend money to a borrower with a low credit score, there are more chances of default, but you can get high-interest rates. You should think carefully about how much risk you can afford to take and keep in mind that you can lose all of your money if a borrower defaults. Thus, always invest according to our risk appetite.
Diversify Your Portfolio
Diversification is the key to reduce risks in peer to peer lending. You should split your capital across multiple small loans to reduce the risk of default. When you invest in different types of loans, and one loan goes wrong, you can still get returns from the other loans. Furthermore, with a diversified portfolio, the profits you can earn are higher than the defaults.
Keep on Reinvesting
If you want to get maximum returns from your p2p investment, you should not withdraw your returns and keep on reinvesting. This way, you can enjoy the benefit of compounding interest and take the best out of your investment. You can also use the auto-invest function offered by platforms to reinvest your money. It can save you from the hassle of spending a lot of time managing your investment portfolio. Make use of auto-invest functionality and let the p2p platforms do the hard work for you.
Before you invest money in peer to peer lending, make sure that you have rough funds to cover your emergency financial needs because it will take some time to withdraw cash from p2p platforms. Although it is simple and straightforward to invest in pp lending, you must keep the above-mentioned things in mind so that you can avoid the risks and get the maximum returns.