Peer to peer lending is a fairly new kid on the block, but one that’s making its presence clearly known. The idea behind peer to peer lending is that individuals provide unsecured loans to those looking for finance, a move that has tempting advantages (ROI-wise) on traditional bank or building society savings accounts. The P2P industry is growing at a rapid rate, driven by the awkward difficulties of obtaining loans from banks these days, as well as the general loss of faith in the established banking industry since the 2008 crash.
Whilst, of course, not without risk, peer to peer lending has some real advantages to offer. With peer to peer secured loans through The House Crowd, short term investments with a fixed return give investors the confidence of knowing what to expect. That’s not to say, however, that you can just rush into P2P lending willy-nilly. You do need to know what you’re doing in order to make the right kind of investments for your needs.
That’s why we’ve put together these handy tips, to help you on your way to getting started with peer to peer investments in a smart and informed way!
Any financial advisor you speak to will tell you how important it is to have a fully diverse portfolio of investments. The same goes for peer-to-peer lending.
We recommend spreading your risk by ensuring you don’t lend out any more than 1% of your portfolio to one single business. With peer-to-peer lending, you should further diversify by spreading investments across multiple platforms.
This is good advice when it comes to maximising return, and giving you the perspective to ascertain which loans are generating the best yields. Furthermore, if one platform you’re using suddenly experiences issues, or – worse still – vanishes altogether, then by having spread your risk across multiple peer to peer lending platforms, you’ll be in a far less vulnerable position.
The more you diversify, the less likely you’ll be to lose money on your investment.
Knowledge is power, and when it concerns your financial investments, it’s no less than crucial. There’s also no excuse for not being well-informed, especially when there is so much information out there on the web.
Read the reviews on each platform you consider before getting involved. Examine the track records of various platforms, get advice from other investors, keep notes, and compare and contrast before you dive in. It’s important to remember that not all lending platforms are the same, and each have their own practices, and procedures for screening borrowers, as well as handling late payments and defaults.
Here are some handy questions you might like to ask yourself:
- What percentage of loans on this platform fall into default?
- How are borrowers screened and evaluated?
- What average returns have investors produced in the past?
- What is the process for handling late payments?
The better informed you are, the more confident you’ll feel, and the more equipped you’ll be to make the right decisions for your money.
Don’t simply allow your returns to sit idle within the platform. This is a good way to lose out on potential income and lower your return on investment: uninvested cash earns no interest. Take advantage of the compounding yields to be gained by continual reinvestment of returns into new loans.
The peer-to-peer lending market is growing and evolving all the time. As such, it’s key to stay up to date with developments within the industry. Acquaint yourself with new platforms as they emerge, changes to legislation and about the loans themselves.
Remember that peer to peer lending is not a passive exercise. You need to put the time in, in order to get anything out.
Some of the loans you’ve already made could be downgraded or even default, and you need to be fully aware whenever something like this happens. Keep abreast of new loan offers as they come up. Again, knowledge is power… a fact we cannot emphasise enough.
Take it Slow
If you’re just starting out with P2P lending, don’t rush in. Do all that reading and research, but remember that the best way to learn is to actually begin. Start with smaller amounts, tentatively monitoring how these small investments perform. This will act as a kind of practice run, and give you the chance to understand the lending platform you’re using.
As with anything in life, taking on too much too soon is likely to leave you feeling overwhelmed, and leave you prone to making mistakes, which could be costly.
Know Your Risk Tolerance
We all have one. So, what’s yours?
Higher risk tends to equate to higher reward, but if you’re not comfortable with that level of risk, take a step back to a risk profile that fits your tolerance better. It’s important to carefully consider how much risk you’re prepared to take, and only invest accordingly.
A strong emergency fund is absolutely vital in order to cover your own personal expenses. Your investment funds should be comprised only of any money you have that is surplus to your daily needs and your emergency fund. Remember that you will not be able to withdraw money from your P2P platform on a whim.
These are just some of the most important factors to consider before you get cracking with P2P investment. You should, as we’ve said above, keep up to date and well-informed on the industry, and monitor your investments closely. It may feel a bit ‘hands-off’, but investments of this kind are certainly not a passive income source. The more you put in, attention-wise, the more you stand to get out.
You can always find out more about investing with The House Crowd by checking out all our guides and articles right here on our website. And if you’ve still got questions, our team is on hand to help!