There is a saying “if it’s worth doing, it’s worth doing it well.” This is especially true when it comes to investing your money. No matter which investment platforms you choose to utilize, careful consideration and evaluation is necessary before you expose yourself to risk.
Peer-to-peer lending (P2P) is something that emerged in the aftermath of the world financial crisis of 2008. It was a response to the capital restraints that were experienced by traditional banks which made lending extremely difficult.
Suddenly, P2P lending enabled anyone with money to lend it to anyone that needed to raise capital. This is facilitated by using a platform to help structure the deal. Investors can choose their risk appetite and earn a reasonable interest rate, and the lender is able to gain access to capital with a lot less red tape.
There is however a “but” coming: as with anything, risk is always a factor. P2P lending has definitely grown to a respectable $800 billion industry by the end of 2017, but there have been some growing pains that have taught us quite a few lessons.
As a Prospective Investor, Consider the Following
Any investor must do a sound, practical, and fit-for-purpose analysis of what they want to invest in. With specific focus on P2P lending as a branch of your portfolio, here are some considerations to keep in mind as an investor.
If You Are New to This, Start Small
The sheer speed and convenience of P2P lending makes it easy to get swept up in the hype. Returns advertised seem extremely promising and you can often find yourself persuaded to increase your original capital expenditure amount.
However, it’s best to follow your original instinct and not allow yourself to lose focus. According to the The Economic Times, a new investor shouldn’t allow greed to cloud their judgment once you start seeing results. They also recommend spreading the risk among borrowers, even if small amounts offer less value.
Not All P2P Platforms Are the Same
It is incredibly important to do your homework. After about ten years of P2P lending, it’s fairly safe to say that the market has managed to earn some respect. This does not, however, mean that it is the same across the board.
As a new investor, it is sometimes ideal to go with platforms that have been in existence for a while, as they will have better reviews and reputational backing to give you the peace of mind needed. Established platforms will most often offer a lower return, but it will at least give you the experience you need until you become more street smart.
You Are Not Limited to Your Country of Residence When Investing
The great thing about the Internet is that you can access any P2P platform anywhere in the world as long as you have an Internet connection. The only thing to be aware of here are the limitations set by your country’s exchange controls and the rules that apply to your bank.
You must also be aware that there are costs involved when money is exchanged across sovereign borders and this will impact the rate of your return. Be mindful of your local tax laws as well as the ones where the P2P platform is registered to. Small print can have a big impact on your net bottom line.
Be Sure to Whom or What You Want to Invest With
They key word here is diversification. Make sure you explore more than one P2P platform and do your research on each of them.
Always factor in that borrowers may default and want to restructure their debt. According to singsaver this means that the investor stands a lesser chance of losing money, but it also means that you are less likely to turn a profit. This doesn’t happen often if the P2P platform does proper screening, but you need to be realistic.
There Are Costs with P2P Lending That Affect Both the Lender and the Borrower
Be very mindful of things like administration fees and/or commissions that you have to pay to a P2P platform. There are also some platforms that prefer to use a proprietary remittance provider, which is sometimes more expensive.
Practice Safe Information Security Practices When Dealing with a P2P Platform
Information is considered a commodity, and this means it has value. Just be mindful that there are a lot of scams out there, hence why a good research initiative is a very good idea. Make sure your personal computer has the required antivirus software installed and perhaps explore taking out insurance from your P2P provider if available.