Looking for the best way to invest your money is something the human race has tried to perfect for centuries. A short decade ago saw the greatest financial crash in human history and yet by the looks of it, many countries, businesses, and consumers are going to repeat the same mistakes that led up to that magnificent implosion in the first place.
The financial crisis did bring about the creation of crowdfunding or Peer to Peer (P2P) lending as it is also known and the benefits are easy to identify. Yet despite all the good and the bad, you need to do your homework before you take the plunge.
This article is going to demonstrate that P2P lending still offers an incredibly good return and that despite some regulation, market correction, and failures, it is nonetheless a sector that has matured and offers great options.
What Is the Draw to Be a P2P Investor?
According to the Economic Times in India, P2P lending has a definitive advantage over conventional bank-based investment options. All they say is that the investor needs to make sure they understand the P2P process, feel comfortable with the vendor of choice, and keep in mind that this is unsecured lending with a higher risk profile.
From an emerging markets point of view, countries like India and China do seem to lean toward this form of investment as there is just an overwhelming desire to produce returns that outpace mainstream offerings.
In the UK, there is a very positive example as reported by UK Tech where the P2P lender called Zopa managed to secure £44 million to set up a conventional bank. Their value proposition will offer all the benefits of traditional banking coupled with that of P2P lending, therefore giving more options to consumers that need both.
What Are Some of the Concerns about P2P Lending around the World?
- P2P Lending in China
There has been quite a shakeup in the Chinese P2P lending industry over the last year. The South China Morning Post wrote an article recently where they talked about all the corruption the government has unearthed with reckless P2P operators that were falsifying lender and other data.
Not only did a lot of people lose their money, but regulation has now started to creep in and this will make the industry less competitive than it was before.
- P2P Lending in the United Kingdom (UK)
There is a report out by Forbes Magazine that the United Kingdom’s Financial Conduct Authority has introduced legislation to safeguard investors. Although this legislation isn’t really based on swathes of corruption or sweeping defaults, it’s more a case of proactive policy to prevent any need for reactive measures.
Here the government does make it a little more laborious to conclude a P2P transaction, but it gives a lot more reassurance to both the P2P lender and the borrower. This could give the UK a competitive advantage as the quality of P2P lending gives a higher yield and a better sense of security.
What Every P2P Investor Must Never Forget
- Never Put All Your Eggs into One Basket
This isn’t exactly mind-blowing advice, nor is it new. This is, however, best practice often forgotten when there is a rush to seize the greatest investment opportunity out there. Always diversify your portfolio and never part with money you cannot afford to lose.
- Do Your Homework
Never rush into any investment. Always take the time to research the P2P provider and for that matter the lender. Follow your instinct if you sense this is something that will not work out. Listen to that voice of reason when it comes down to the wire.
- Crunch the Numbers
Despite the really wonderful returns, most P2P lenders offer, you still have to do some sound calculations and make sure your return is going to be what they claim it will be. Look at taxes, bank charges (remittances especially), and admin fees.
See if it’s a very proprietary P2P lender that offers great value, on the one hand, only to hit you with other charges down the line. Don’t place your sole focus on the return advertised without considering the hidden costs that cannot be avoided throughout the lending lifecycle.
- Compare Apples and Oranges
Just because traditional bank deposits are an old and trusted platform, doesn’t mean it’s not relevant. If your P2P provider cannot offer you a better return than that of your bank, then it’s definitely not worth the risk. So make sure to do a bit more research and find a provider that is well respected, offering the right level of risk and of course return when compared with traditional modes of lending and investing.