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What you need to Know before Investing in Peer-to-Peer Lending

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With just about a decade since its introduction and the advent of online platforms in support of it, peer-to-peer lending has grown into a major source of money for borrowers who need quick cash with less restrictions. Basically, peer-to-peer lending cuts off the middle-man such that the borrower can deal directly with the lender. In effect, the process gets smoother and easier, and ultimately more convenient to both parties.

However, if you’re a lender looking to start investing in peer-to-peer lending, it would be smart for you to dig up whatever information you can about the venture before you plunge in. There’s nothing riskier than committing your money blindly. To that effect, below are some very insightful facts that you need know about peer-to-peer lending:

You Can Put Your Money in Partial Loans
When you join a peer-to-peer lending platform as an investor, you have a choice to either fund a borrower’s guaranteed approval loan in full or contribute an amount to it. The latter plays out when different investors release proportions of their money to partially fund one person’s loan. The interest paid on the full amount is then distributed to the involved lenders respective of their contribution amounts.

Whenever you come across a loan request that interests you, you can always contribute to it as opposed to footing the whole bill.

The Platforms are regulated
The worst mistake any investor can make is to join and commit their money in funding ventures on a platform that’s not legally regulated. An unregulated business environment has all the hallmarks of a black market, and that means that the risk of you losing loads of money is optimal. Why would anyone want that?
Luckily, peer-to-peer platforms are regulated by the relevant authorities in the countries where they operate. In the event that you want some help in sorting out an issue, you can contact the Securities and Exchanges Commission or any other national body tasked with overseeing the platforms.

Diversification is Key
In an environment as active as a lending platform, you bump into all sorts of loan requests spread across a number of different lending options. You can spread your investments across these options and stand to gain by reducing the risk of loss and increasing your overall investment volume. Also, you boost your turnover and money circulation around various lending drives.

In essence, the trick is to avoid funding any loans in full. That way, you reduce the amount of your money exposed to a single risk. If one loses a small amount, the interest gained from the rest can always cover it and cushion you from a net loss.

Mind the Fees Charged
You realize that the lending platform makes something out of every deal transacted, and that “something” is deducted from the borrower’s amount as well as the lender’s. Note that as a lender, you don’t really lose your deposited money. The charges are deducted from the interest you gain from your investments.

However, a smart investor would want to join a platform that doesn’t hack off a significant chunk of their profits. Keep that in mind before you join in and make sure you a draw a comparison of various lending platforms to find the most appropriate for your needs. The information you need is provided on the platforms.

Read the Fine Print
The one thing that truly consumes many investors is ignoring the fine details of an engagement. If you’re going to be committing your money funding loans on a platform, you deserve to know what mechanisms are in place to protect your interests.

For example, what should happen in the event that a borrower defaults on a loan you funded? What contingencies should come into play in case there is a recession? In some cases, the platform management may have a contingency fund in place to refund your money in case of a bad debt.

There’s Good Interest, but There’s Risk Too
For one, many investors love the peer-to-peer lending arrangement by virtue of its good profits. They get to rake in some nice interest from their investments while the borrower gets a loan at low cost. In fact, the interest you get from peer-to-peer lending deals could well be higher than what you could get by investing with banks.

However, there’s a downside to it too. There’s risk of losing your money on bad debts if the platform doesn’t have reliable mechanisms to recover your money from defaulting borrowers. You have to decide whether that’s a risk worth taking or not.

What Do You Know About The Secondary Market?
There’s this thing about peer-to-peer lending called the secondary market, and you should know about it too. This is some kind of a market where you can buy or sell your stake on a funded loan.

For example, if you funded a loan and then happen to bump into another borrower request that you would like to service but you don’t have funds at the time, you can dispose of the previous holding by selling it off on the secondary market to release your funds. Another lender, who in this case buys the stake, takes over in your place.

A P2P Platform is Basically a Marketplace
Think about a marketplace, and you’ll find that the online peer-to-peer lending environment is much like it. This is where borrowers meet lenders. In fact, some platform managers take it upon themselves to source for both the borrowers and investors, and then they match them up on the platform.

With that in mind, you’ll know that it’s not smart for you to lend to any strangers outside the platform. Be wary of that. Don’t get swindled of your money so easily.

You see, as much as investing as a lender on a peer-to-peer lending platform can make for quite a good investment, going in armed with all the necessary information puts you in a much better position to navigate the waves of the business. It’s better to know more and avoid risks than to jump into bad deals expecting to hit gold.

All trading carries risk. Views expressed are those of the writers only. Past performance is no guarantee of future results. The opinions expressed in this Site do not constitute investment advice and independent financial advice should be sought where appropriate. This website is free for you to use but we may receive commission from the companies we feature on this site.
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Michael Booker

1 Comments

  1. Nice article! You mention some things that others do not, particularly the fact that these platforms are regulated. Building on that, there are skilled investors and institutional investors using these platforms. This is not the wild west of investing as some bloggers like to suggest. Your points about fees, fine print and risk highlight the fact that P2P loan investors really need to be educated. They should not expect to achieve even platform average returns without thoroughly understanding peer loan investing and following an investment strategy to meet their goals.

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