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Is P2P Lending Safe? Here’re The Few Strategies to Reduce Risks

P2P Lending is an attractive investment idea for investors who are tired of investing in low return bonds and government debts. The investment through P2P platforms also reduces trader’s exposure towards volatile stock and forex markets. Indeed, some platforms are offering a double-digit return on P2P lending.

Despite lucrative returns, there are several risk factors to consider before beginning P2P lending.

What are the Risk Factors for Investors to Consider?

  1. You can lose money in the case of default. This is because P2P platforms don’t set strict standards and guarantees.
  2. Don’t rush to get an enormous rate of return. The rate of interest on some loan types stands around 30%. It is important to understand that people with low credit scores and poor credit history takes loans on higher interest.
  3. In case of default, the P2P platform may also require you to pay for certain collection costs, which could create a negative impact on your overall returns.

Here’re the Few Strategies That Can Minimize Risks:

There are several ways to minimize the risk factors. Investors should use a balanced approach to reduce risks. The P2P investors should use these investment venues to supplement the fixed income portion of their investment portfolio. It has never been considered as a wise idea to allocate all of your investments into P2P loans. Instead, the investors should use 20% to 30% of their portfolio for P2P loans.

Making small loans to several borrowers instead of making a big loan to a single individual is one of the best ways for lenders to reduce the risk of default. Investors should also not focus on a single loan category. Diversifying your investments across many different loan categories and notes would help in achieving maximum returns. Investors should also not favor loans to borrowers with low credit scores. Investors should offer loans to borrowers with high credit score combined with greater employment stability.

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Based in Saudi Arabia, Siraj has a strong understanding of and passion for accounting and finance. He has worked for international clients for many years on several projects related to the stock market, equity research and other business, accounting and finance related projects. Siraj is a published financial analyst on the world's leading websites including SeekingAlpha, TheStreet, MSN, and others.