How P2P Lending Can Get You An Extra Source Of Income
Supplement your income with P2P lending
With rising inflation rates and an uncertain economic climate, there is much interest in financial planning, wealth management and multiple investment streams as a safety net for the future. There is now a rising awareness about passive income and investing your money to compound its growth. You may be aware of traditional investment assets like mutual funds, the stock market, real estate, gold etc. While these are all useful options, you must also look at atypical investment options such as the Peer to Peer (P2P) lending market.
P2P is an approach to debt financing that helps individuals borrow and lend money without using banks or conventional finance institutions as an intermediary. It eliminates the need for a middleman and provides an online platform to connect lenders and borrowers, known as P2P platform or P2P marketplace where the loan disbursal takes place.
As an investor or lender in this scenario, it is important to understand how you can leverage P2P lending to earn extra income. Basically, the platform enables borrowers to apply for a loan. These borrowers may include a number of people who may not be eligible for a bank loan for various reasons. The P2P lending platform evaluates the credit-worthiness of these borrowers by evaluating them on preset parameters and assigns a score to the borrowers, if approved.
How to generate extra income with P2P lending
Lenders and borrowers both need to register and provide a number of documents including some KYC proof. Now, lenders can manually browse through the borrower profiles, check their assigned scores and invest in one or more borrowers by splitting the sum they wish to invest. Alternatively, they can use a mechanism provided by P2P platforms called auto investment.
Some auto investment tool use algorithms to match profiles to your preset criteria, based on the amount you want to invest and your risk-return appetite. The tool will then spread out and invest your sum across borrower profiles to optimize the result. For instance, you decide to invest Rs. 20,000 over a period of 15 months, then you can split it across four borrowers instead of loaning out the entire sum to just one.
Since borrowers repay the lenders in the form of EMIs, P2P lending becomes a supplementary monthly income. This is the key difference between P2P lending and other investments, where you may receive the principal and interest at the end of your lock-in duration. P2P lending sets up a regular stream of cash-flows right from the month following your investment.
What’s more, if you want to further grow your income, then the auto investment tool will also find new potential investments using the criteria you have set.
This means you generate more income from your monthly returns. It never sits idle and gets automatically re-invested month on month. This compounded wealth creation is a smart way to earn a passive income.
The loans generate a moderate to high income from interest, which is often higher than conventional savings vehicles.
Optimizing your income
Once you have got the handle on investments, you can focus on your net returns. It is best to leave the investment for a while before you can start measuring the returns. Twelve to eighteen months is an ideal time-frame before you can study and analyze the results of your investment.
To minimize the risks from defaults and protect your principal investment, spread your sum across borrowers. If your investment is diversified across several loans your profits will be higher than the defaults.
Minimizing risks and maximizing returns
Like all financial investments, you have to exercise caution and invest smartly. What are some measures you can take to mitigate loan defaults and earn attractive returns?
· Research your P2P lending platforms well. Find out information on their average returns, recovery process, defaults etc. If this information is not readily available on their website, get in touch with them with your queries.
· Assess how your P2P lending platforms evaluate the borrower’s creditworthiness. What are their scoring criteria? Do they consider the borrower’s CIBIL score?
· Ensure that the P2P lending platform follow RBI regulated standards and also check the overall sentiment regarding the platform. For those looking to supplement their income, P2P lending provides multiple benefits including high interests, low volatility and risk diversification. With a disciplined strategy and due research, you can make safe, profitable and recurring income.