The Basics of P2P Lending for beginners seeking a new investment opportunity

Peer-to-peer lending, also known as P2P lending is a method that allows individuals to lend and borrow money without the intervention of a financial intermediary like a bank. While the removal of the intermediary makes the process more efficient and less expensive, it can also entail more risk for the lender. In a conventional scenario when an individual requires money, he applies to a bank, which then evaluates the proposal and the borrower’s creditworthiness to determine his eligibility, the credit limit, and the rate of interest. In typical P2P lending, the credit check is more cursory and is normally performed with a perusal of the borrower’s profile displayed on the online P2P platform. A lender may choose to limit his exposure up to a certain limit at a particular rate of interest and it is up to the borrower to accept it.

Principal Benefits of P2P Lending for Borrowers and Lenders

The main attraction of P2P borrowing is that borrowers can approach multiple lenders at the same time and get the loans at very attractive rates of interest that are substantially less than conventional bank loans without having to meet strict eligibility norms. Similarly, P2P lending is an opportunity for individuals with cash surpluses to earn more attractive returns than conventional investments. Given these characteristics, it is not surprising that https://www.entrepreneur.com reports the P2P industry has experienced a compounded annual growth rate of 313 percent in the period 2013-18. A quick look at the various factors that budding P2P investors should consider before deciding to start lending:

Stability and Performance of the P2P Platform

In a new industry like peer-to-peer lending, most of the platforms are relatively new so finding one that has a track record can be bit of a problem. However, you should make an effort to know the performance of the platform, though it is never an indicator of future yields. However, a platform like https://www.libertylending.com/that has been in existence for some time is more likely to have ironed out most, if not all, the IT bugs and operational flaws that may jeopardize your funds. While it can be difficult to get hold of the financial performance of the platform, you should try and find out what other users are saying about it in online reviews.

Term and Type of the Loan

As an investor, you will need to decide for how long you will want to fund any borrower and the type of loan you want to extend. You have to appreciate that it is not possible for any loan to be recalled once you have committed it for a particular term to a borrower. The only way you can exit is by selling off your exposure to another willing investor using the secondary market. However, if you are on a platform that amortizes loans, you will be getting back a part of the principal along with the accrued interest each month. As far as the types of loans are concerned, there are essentially three main types; SME loans, consumer loans, and loans secured by a property. Before deciding on any type of a loan as your focus, it is better if you learn about its advantages and risks.

Diversification of Portfolio

As in any investment, it is also important for you to diversify your loans when lending on the P2P platform. With every step that you take to diversify your portfolio, you secure yourself more against the downside of the market. Of course, diversification does not enable you to take advantage of the best yields but surely that is a small price to pay for security. It is easier to diversify on consumer loans than on real estate backed loans because the variety of real estate is so much less and the market tends to move in the same direction for all types of properties in the same time frame.

Auto-Invest Facility

An auto-invest facility is a great thing to have on the P2P platform because once you specify the minimum rate of interest acceptable to you and the period of the loan, the platform will automatically allocate your funds to investment opportunities that are the best match, provided of course that you have enough of an account balance. This feature spares you to the constant endeavor of scanning new borrower requirements and then making up your mind whether to fund them or not. Unless you spend a lot of time on the platform, you are likely to miss some of the more attractive opportunities. However, beginners are advised to make their first investments manually so that they know better the sort of opportunities there are and how they are being funded. For big-ticket investments, it is always better to do your due diligence yourself.

Secondary Market

The secondary market serves to give an alternative route for making investments and also to exit loans that you have made earlier. For example, if you have not invested in the primary market on the platform, you can deploy your funds buying the investment portfolio of other investors who are looking to sell them off. The secondary market operates on the simple matching of demand and supply; if you want to sell off your loan, you can only do so if there is an investor who wants to buy it. The liquidity of the loans keeps on changing and depending on the market sentiments there could be more demand sometimes while the pressure may on selling at other times. Operating in the secondary market is akin to playing the stock markets, only instead of equity, you are trading debt.

Conclusion

P2P lending is quickly attaining momentum because of its many unique advantages for retail lenders and borrowers. Operating on the lending market can be extremely rewarding because you can start with relatively small amounts and it is easy to diversify your portfolio. Of course, for your investments to have a healthy ROI, you need to spot the best investment opportunities. Beginners should preferably start out with loans that are backed by collaterals as they are safer and then venture to lend unsecured loans that have a better ROI.