How to Be a Successful P2P Lender
After Morningstar’s 2016 prediction that traders would receive about 4% yearly returns during the next decade due to inflation, a lot of people started looking for a remedy. The result of this endeavor was P2P investing, a new strategy offering better financial rewards (up to 10% returns according to some pundits).
Due mostly to the direct networking opportunities it provides, P2P (peer-to-peer) investing has surged in popularity, and many traders are now including it in their basic portfolios and techniques.
How P2P Investing Works
P2P lending allows entrepreneurs and small business proprietors to obtain financing without the help of conventional lenders. With P2P investing, you basically make loans just like a financial institution would. You more or less operate a private loan company from your mobile phone or computer using third-party websites like Prosper Marketplace.
The two primary benefits of being a P2P trader are:
1. Distributed Risks – You’ll probably be just one of several funders on the loan, as opposed to putting all of your money into a single project. Additionally, you’ll have the option of breaking up your investment and distributing it across multiple small loans, like splitting up $4,500 into increments of 15 $300 loans.
2. Increased Profits – Loans may reward you with up to 25% returns, which is nothing to sneeze at. Some returns even stand at 35%, but in these cases the risks are generally greater than they’re worth.
The Keys to P2P Trading Success
Succeeding in the world of P2P investing is much simpler when you stick to a few trusted guidelines, which are outlined below:
1. Work with a reliable, respected lending site. You need to be very selective here, just like you would when choosing a trading platform or a brokerage. Shop around and select the optimal P2P loan facilitator. The Lending Club, Prosper Marketplace, and Upstart are all dependable US loan facilitators, while Zopa tops the industry in Great Britain.
2. Steer clear of loan seekers with bad credit ratings. All loan applicants are assigned a risk rating, which is determined according to their basic credit rating, and it’s hard to resist taking on risky borrowers, as their returns may yield up to 35%. A lot of people mistakenly assume that they can lessen their risks by dividing their investment capital between several high-risk projects, and that the majority of them will honor the loan.
But in reality, most of these high-risk borrowers will not pay the loan back at all. So fight the urge and seek out more secure loans, even though they may not pay as much back. Many traders like to loan some capital to riskier borrowers and some to average-risk borrowers to make up the balance. You might consider doing this yourself, but you must be careful (i.e. selective).
3. Look at each applicant’s credit history. It’s common knowledge among P2P investors that loaning money to newbie lendees (regardless of their credit rating) results in deficits a lot more frequently than lending to seasoned borrowers who have a history of repaying loans promptly. A person who has made good on loans in the past is apt to do it again.
4. Consider the big picture. Look at P2P lending in relation to the whole economy, just as you would with any other type of trading. After all, many of these borrowers need capital for building their companies. So if the economic climate crumbles, a lot of them won’t be in a position to settle their loans.
It’s important to remember risk control and planning when P2P investing. Research your options, measure your risks, develop a plan, and then act on it, all while keeping abreast of the latest P2P investing news just like you would do with other types of investments.
5. Take advantage of P2P trading tools. A number of resources exist that help guide you through the P2P trading process and increase your chances of success. These apps can filter out high-risk borrowers, check basic financial trends and data, and assign borrower risk ratings according to different statistics.
There’s always some risk involved with any kind of investing, but these tips should steer you in the right direction toward a profitable P2P trading career.