Peer to peer lending, also known as p2p lending, is a way of financing that matches lenders with potential borrowers. In this low-interest rate environment, investors are looking for alternative investments that can provide high-interest rates. Peer to peer lending proves to be an excellent alternative investment providing attractive returns to the investors than other forms of investment.
It is also beneficial for the borrowers, and they can get quick access to the funds at a rate lower than traditional bank loans. Due to its benefits, p2p lending is becoming more and more popular. Investors, especially the young generation, want to invest in p2p loans as they do not involve financial institutions or banks.
Here we are describing the top 10 tips that can help you in becoming a successful p2p investor.
Compare Available Options
The p2p lending market is growing rapidly, and there are many p2p platforms present in the UK. New platforms are also emerging, and the market is not yet efficient. The interest rates can vary from platform to platform. It can differ from as much as 6% per annum for loans with the same risk profile. So you should do research, shop around and make price comparisons to get the highest returns available.
Diversification is the most important rule of investment, and it also applies to the p2p investment. We suggest you spread capital across multiple loans, geographies and loan types. If you invest all your capital in a single loan, you can lose all money if the borrower defaults. So you should invest in multiple loans so that a single default can not cause many effects on your return. Ideally, a single loan should not represent more than 0.5% of your portfolio. Moreover, you should allocate your asset to a platform that has the best returns, risk adjustment, track record and customer service.
Take Advantage Of Sign Up Bonuses
Most leading p2 platforms in the UK offer sign-up bonuses credited into your account when you sign up. This bonus can be a fixed amount or a percentage of the amount you invest. It can be a good way to boost returns early. However, you must look for the platform offers to sign up bonuses to get the advantage.
Invest In Secured Loans
In a diversified portfolio, there is a role of all types of p2p loans. However, the majority of loans in your p2p portfolio must be secured against a property or any hard asset such as jewellery, vehicle or machinery. Secured loans always provide a suitable return to the lenders and also have a low risk of default. Moreover, if a borrower defaults, the lender can sell the asset and get the loan amount back.
Use A Secondary Market
A secondary market can be a great source for investors to build a diversified portfolio. Sometimes p2p platforms have limited loans availability. Secondary markets offer liquidity to investors who are in need to raise cash. You must look at the payment history before purchasing a loan. Avoid the loans that have frequent arrears, and those which are near to maturity and the seller has a doubt about repayment of them.
Do Your Own Research
It can never be a good thing to rely on the information that a p2p platform or lender provides you. However, when investing a large amount, it is always worthwhile to assess the information, such as the value of the collateral. It is relatively easy and quick to access, and it can help you to avoid unexpected losses in the future.
From the last financial crisis in the UK, we all understand that liquidity can dry up in unexpected ways very quickly. Although most p2p platforms have a secondary market that is highly liquid currently and loans can be sold quickly, no one can predict whether this liquidity can continue during the next crisis or not. So you can not rely on the secondary market for a future exit. They are only a tool to rebalance a portfolio and to sell loans that are not performing effectively.
Understand All The Risks
Like all other investments, p2p investment also has some risks. You should consider the risks before investing in p2p loans. All the successful investors understand well that these risks are unavoidable, so they take measures to avoid such risks. Of course, it is not possible to avoid all the risks completely, but you can take measures to minimise risks and earn high returns.
Don’t stick To Home Country.
When investing money in p2p loans, you should not stick to lending money to people in your own country. Instead, it is beneficial to invest in loans abroad, and you can diversify your portfolio by investing in loans out of your country and making high returns. Furthermore, some platforms allow you to invest in your home currency.
Don’t Be Too Passive.
Peer to peer lending UK is an excellent way to earn high returns on investment. But you should not be too passive and leave your accounts unchecked. You must regularly check your p2p account to ensure that the returns you are earning are according to your expectations, and the cash held to account is kept to a minimum.
These are the tips that can help you in getting the best out of your peer to peer lending portfolio. Keep in mind these tips when investing in p2p loans and take measures to minimise risks so that you can earn high returns. Many new investors think that it is much risky to invest money in direct loans but if you understand this type of ending and take measures to mitigate risks, you can make it a source of passive income. In this low-interest rate environment, other investment options offer returns that are not enough to beat the inflation rate.
P2p lending is relatively a new investment but it offers a high return to the investors. So in the end, we can conclude that through p2p lending you can earn high returns on investment without taking much risk.