How To Mitigate The Risks in Peer To Peer Lending?
Peer to peer lending is a relatively new way of lending that allows investors to borrow money through an online platform. It does not involve any bank or middleman, and you can lend money to borrowers of your choice. With p2p loans, you can lend money to individuals, businesses or property developers. It is a fast and easy way to invest money and get high interest in return. You can make an account online, deposit funds and start lending. Although p2p lending offers many advantages, like all other investments, it also has some risks such as borrowers default or platform bust.
Here are some ways that can help you to reduce risk in peer to peer lending.
Choose Right Platform
Several p2p platforms are available in the UK, so it can be challenging to choose the best. You must shop around and check customer reviews to find out the transparency of a platform. It is better to check the track record before making a final decision. Track record indicates the number of defaults and makes it easier to choose a platform. We also suggest you choose a platform that is authorised and regulated by the Financial Conduct Authority.
Diversify Your Portfolio
Diversification is the major factor in managing the risks. If you want to invest safely, it is better to spread your investment across multiple loans. This way, you can reduce the chance of default borrowers. Most of the platforms categorise borrowers as low risk and high-risk borrowers. You can choose borrowers with low risk; however, it offers a low-interest rate and reduces risk. When you invest in different loans, you can still earn profit from the other loans if one borrower defaults.
Follow Up Loan Recovery
Recovery of a loan is an important thing when you lend money. So you should select a platform that can assist you in the recovery process. All the steps, from follow up to taking corrective action in case of delays are crucial. You may need to take legal action in some cases. Therefore, when choosing a platform, make sure all the legal agreements are well-drafted, and actions are being taken according to the agreement. Always choose a platform that is operated by highly qualified and experienced management and follow best lending practices.
Start with Small Investment
If you are new in peer to peer lending, it is better to start with a small amount. You can invest in different assets like saving accounts, bonds, and stocks & shares along with p2p loans. First, try to understand the process and rules of p2p lending, and when you get experience, start increasing your capital.
Invest For Longer Time
If you really want to earn high returns, you may have to wait a little longer. Because investment is a long term commitment, you should keep your money invested for one to two years. Moreover, do not let your money sit idle and keep on reinvesting.
Peer to peer lending is a great way to earn high interest rates in this low-interest-rate environment. What you need is to keep in mind the risks associated with it and follow the ways mentioned above to keep the risks low.
