If you are looking for investment options, you may have come across the term ‘p2p lending’. Although the basic concept of p2p lending is not new, technology has ensured that this system works in a fine-tuned, systematic manner. It’s only through tech-based systems that the power to lend is now available to any individual who wants it. Borrowers also gain, as they don’t have to go through the lengthy process applied by traditional lenders such as banks and other financial institutions.
P2p lending is being preferred by many people, as it can deliver high returns on your investment. However, since it is an alternative system of investment, people usually have doubts about how it works, safety aspects and risk factors. People looking to invest often wonder if p2p lending is safe and profitable. If you are having similar doubts, here are some key things you need to know about p2p lending.
Choose the right marketplace – A number of p2p lending platforms have been launched in recent years. Make sure the p2p marketplace you choose has a proper review and credit assessment system for borrowers. This will ensure that you will be dealing with borrowers who have a higher probability of paying you back. You also need to review the profile of the borrower thoroughly before lending them any money.
Linked to credit bureaus – The p2p marketplace you choose should have a system that reports borrower data to credit bureaus. This will ensure that you are dealing with genuine borrowers. It will reduce the risks associated with your investment. When borrowers know that their data is being sent to credit bureaus, they are less likely to default on their payments.
High-risk, high returns – Just like other investment avenues, the concept of high-risk, high returns applies to p2p lending. On p2p marketplaces, you might come across borrowers with a low credit score or none at all. In such cases, you might have the opportunity to get higher than normal returns. Your decision will depend on how much risk you are willing to take. Do not take unnecessary risks that can affect your everyday life.
Start small – Rather than directing all your savings to p2p lending, it would be better to start small. You can choose p2p platforms that allow you to start with small investments. The returns you get can then be channeled back to p2p marketplace.
Last but not least, make sure you have a diversified p2p investment portfolio. Some of your investments can be allocated to high-risk borrowers whereas other funds can be given to borrowers with average or high credit score. The ratio will depend on how much risk you are willing to take. P2p lending can give high returns, but you can also end up losing your entire investment. So assess your finances and risk appetite before you start p2p lending.