In the recent years we can see the emergence of a new investment opportunity for investors who seek for income and are willing to do a little extra homework. It is the Peer-to-Peer lending or p2p lending.
Mostly when we think about investment opportunities, we think about investment in stocks, bonds, real-estate investment trusts, Etc.
Peer-to-peer lending can be an alternative income source or another way to diversify your portfolio and can be great for investors who take the time needed to understand the risks and rewards. If this sounds interesting, read on.
What are the Peer-to-Peer lending and how they work?
The idea behind Peer-to-Peer lending or social lending platforms is to connect individuals who want to take a loan and those who wish to lend their money and get attractive returns while diversifying risk and low volatility relative to the market.
Social lending platforms provide the safest environment for both sides, because the details of the loan remain confidential in the system, while the platform takes care to manage the entire process for the investors, from a careful screening of applicants for loans, credit rating and management of the collection process.
I want to invest in loans – how does it work?
In fact, the loan is classic financial intermediation activities of financial institutions.
Both in the case of a bank loan and a loan from the credit cards companies, a loan is granted by transferring money from the account of one person to another person’s account.
For these actions, the banks and credit companies charge excessive and unreasonable interest rates, on the other hand, offer zero interest on the deposit to investors.
Today, with the development of social lending platforms we can give up on the traditional mediators.
How to start investing loans?
- Open an investor account website.
- Transfer money (mostly minimum of $2500) to the Account.
- After transferring choose a portfolio based on a model corresponding to each risk or choose specific loans from the lending market.
- In order to spread the risk, each investor pays only a fraction of the total loan amount (and you need to diversify your loan portfolio as well).
- Once the loan amount is deposited in the account of the borrower, you can also see the status of the loan and the expected revenues from the loan.
How the platform reduce the risk and help you get your returns?
In order to reduce the risk, the social lending platforms operate in the following ways:
- Severe testing procedures and use of advanced technologies.Any person applying for the loan undergoes rigorous screening checked during his identity check, his credit history checked, and using statistical models and by underwriting manually in order to evaluate the risk of bankruptcy.An application that is incompatible with the strict terms will be rejected.
- Limiting the amount you can spend on each loan. In order to spread the risk of insolvency, and damage the yield to the lender there are limitations on the amount that each lender may give to a single borrower.
- Use a separate trust account before they are transferred to borrowers. At each stage, according to your instructions the funds which are not allocated to loans, will be transferred back to the trust account.
in order to invest successfully with Peer-to-Peer lending or p2p lending, we collected the best investing tips from 30 experts in the field.
- Diversify your loan portfolio over many loans and across platforms. you can take advantage of $25 minimum per loan that some platforms have, and diversify your portfolio with at least 250 notes to 500 notes (preferably 500) in order to make your portfolio truly diversify.
- Do your homework/research: which means, search for track records of the platforms. how long they are in business, if they have been in bed times for the credit market and what happened.Check all the documentation and data you can find. Talk to the executive team. Ask them what regulatory vehicles they are using to keep their offerings compliant.Read more: http://thelendingmag.com/peer-to-peer-lending/#ixzz4HcQ2AhEt
- Invest in an IRA (* this particular tip was strictly from the US experts & applies to US lending only)
- Reinvest your returns, don’t let returns sit and idle: the best platforms will give tools to automate your lending process and truly maximize your returns. Use automation to reinvest the cash flow to take advantage of the compound interest.
- Prepare yourself for limited liquidity: know that most of the money you invest in a loan is not available if you need it.
- beware from long periods (more than 36 months) the risk is higher.
- beware from big loans, the bigger the loan, the bigger the payment. and in times of crisis, it will be harder to make the payments. it’s best to avoid from loans bigger than $15K