Beginner’s Guide To Get Started With P2P Investments
Peer to Peer lending or P2P lending is one of the newest investment asset classes that has caught the attention of financial advisors and investors alike. P2P lending helps lenders to earn great returns in terms of interest on their capital by lending it as a personal loan on an online platform. You can receive returns in the form of regular repayments of the interest and principal amount.
The disbursal of the loan takes place online on a P2P lending platform. And for any given loan there may be a single investor or it could be spread among several investors who put up the funds and share the risks and returns.
There are several reasons why P2P lending is emerging as an alternative investment option. Namely, it offers investors (also known as lenders in the P2P context) high flexibility, transparency, low investment amount and a higher return than traditional assets.
In terms of P2P platforms too, there is ample choice and information available online. You don’t need the services of a specialized broker and can do it yourself after conducting adequate research.
So how does one get started with P2P investing?
1. Study P2P lending as an investment model
The process is simple enough but you should spend time understanding how the platform works before you start lending. Learn about the overall volumes, returns, defaults and recovery processes of each P2P lending platform that you are studying. Check out FAQs, terms and conditions and other information offered on websites.
2. Choose the right P2P lending platform
Diligent investors will take this step very seriously. Set your investment criteria and then shortlist the P2P lending platforms that fit the bill. Don’t make hasty decisions. Compare various factors like default rates, default recovery rates, risk mitigation strategies used, average loan tenure, minimum interest rates etc. Analyze the overall social ‘sentiment’ about the company but take this information with a pinch of salt.
3. Understand how your chosen P2P lending platform works
Once you have narrowed down your search and finalized the platform of your choice, learn how it works. You can start out by investing small. Here’s the process you will need to follow:
· Register and provide relevant documents and forms
· Check how the platform works by reviewing the borrower profiles
· Navigate and know your options
· Make a small initial investment in borrower/borrowers of your choice.
4. Validation and loan disbursal
Once you have made the investment choice, you can also access more borrower information. After verification and validation, both borrowers and lenders sign a loan agreement that is legally binding.
P2P lending and loan repayment typically happens through an escrow account. The lender pre-funds this account with the amount he/she wants to invest. RBI guidelines mandate that the P2P platform provides at least two escrow accounts for fund transfer. These accounts are operated by a trustee promoted by the bank that maintains these escrow accounts.
Now you can start receiving regular EMIs.
5. Auto investment option
Many P2P lending platforms offer something known as auto investment. Auto investment basically uses automation and sophisticated algorithms to make the investment process simpler. All you need to do is select your criteria and the tool will do the rest of your work. From evaluating borrowers on the basis of a credit evaluation system and grouping them under risks buckets, that qualify them from low to high.
Lenders can use auto invest to build a more diversified portfolio quite easily and quickly.
6. Learn Diversification
Diversification is key to earn high risk-adjusted returns when it comes to P2P lending. You can diversify your sum in various ways. Either spread it across multiple borrowers with varying risk grades, interests and duration or spread it across P2P platforms. Both these tactics will minimize the risk of defaults and safeguard your investments. Again, the auto investment feature will help you do this effectively.
7. Choosing Income or Growth
As a lender, you also have the choice to withdraw regular interest payments as income or re-invest these payments for substantial capital growth.
The temptation to withdraw or cash out your P2P returns is strong. But as you start getting your principal and interest repayments, make the most of this opportunity by reinvesting. You can make a significant income by continually reinvesting your returns into newer investment.
To sum it up
P2P investment is a fairly easy process. There is only a minor learning curve involved. You need to study the model, take the necessary precautions and start out small. Once you have mastered the basics, you can build your investment portfolio and diversify.