Peer-to-peer lending is a relatively new means of money exchange online with affordable interest rates. The process is far from risk-free as you are dealing with unfamiliar individuals and businesses through online platforms. There are, of course, regulations placed by both P2P lending sites and state banks to protect lender interests. Nonetheless, it is worth knowing how to mitigate potential threats and problems.
1. Understand the platform
It is advisable to know the P2P platform you want to use before starting to lend money. An investor should do some background research on how the platform works, what the interest rates are, and how high the ratings are in comparison to its competitors. By doing the homework, you will be aware of some of the potential risks. If you want to go beyond official sites there is the option of directly contacting a P2P user. This way, you may gain detailed information about the likely returns and recovery process.
To lower the risk of losing money to untrustworthy borrowers or platforms is by splitting amounts across different P2P sites. It is advisable to start your investments in small amounts. You can use from 3 to 4 platforms to diversify investments and reduce reliance on one borrower. With a spectrum of investments you can balance out the risks and returns, so, even if you gain a small return rate on one platform you have three others to improve your gains.
3. Know the borrower
It is no secret that an investor is more confident in their investment when they know the borrower. Online P2P platforms may lack information. If you are not so comfortable with using online platforms and lending money to strangers, find people you know that need to borrow money, give them a reasonable interest rate and make a deal.
4. Keep some savings
However much you lower the risk of losing the money you’ve lent, you should never use all your savings in P2P lending. In fact, it would be better if you could have some of that in a savings account and not in a P2P lending platform or with a borrower you know.
5. Start slowly
If you are thinking of investing in P2P, start slowly, try investing only a small amount to see how things work. If after two months you find it easy and you like the benefits, you can start investing more. Moreover, you should have reasonable investment durations. Let’s say you have invested for 1-2 years, don’t add more amount from your other income sources, use the amount you’ve already earned from P2P lending.
These are only a few tips on how to lower the risk when getting into P2P lending. No matter what these tips say, the greatest way to learn things is to experience those.