How To Reduce Risks In P2P Lending?
Anyone who has ever lent money to a friend or relative will know how risky the prospect really is. The chances of getting back one’s own money maybe high for some but the tenure is never assured. How many times has the borrower requested an extension? And when the time finally comes when they give you back your money you get only the principal. Of course, the borrowers in this case are friends and family, and you, the lender, do not expect any return. So now that we comprehend that lending money is always risky, let’s move on to the tricks to reduce risks in P2P lending.
P2P lending is a nascent investment model in India but it is one of the fastest growing model and the best concept to get monthly returns on one’s investments. However the biggest worry for a P2P investor is always a borrower defaulting on a loan. So, here are some ways an investor can reduce risks in P2P lending.
Know the concept and the platform
Since it is a new concept in India, investors should understand the concept before investing their money. Conduct proper research and seek guidance from mentors who are already investing through this model. It is also important to browse the platform thoroughly.
The main hurdle of people partaking in digital lending is the obvious question “what if a borrower defaults?” Every P2P player has a different approach of ensuring return of principal to the lender. The investor should understand the recovery process, the default ratio of the platform, and actions taken in case of complete default.
Do not get over-excited
P2P lending has the reputation of delivering double digit returns, more than some mutual funds and stocks. But it does not mean that an investor divert all of his/her surplus only into this model. Choose the amount to invest wisely, but do it regularly.
Choose the right borrower
This is the toughest choice an investor has to make on a P2P platform. All the loan applicants are listed after due diligence by the P2P player. The employment history, current salary, residence, credit score and other details are listed in the marketplace. Only the top players in the P2P lending landscape and those licensed by RBI will list all the mandatory details of the loan applicants. An investor must look at all the profiles before making a calculated decision of lending to an applicant. Also, while choosing P2P platforms go for the one that has been in business for a longer period.
Invest with a long term plan
The secret of compounding the returns is to stay invested for more than 1-2 years and reinvest the monthly returns into the platform. P2P investors who have stayed invested on a platform for a long duration can boast of returns as high as 33%. New investors should start with low amounts for the first 3-4 months and then increase their investments after gaining sufficient knowledge.
Diversify across borrowers
Invest in different loan applicants and do not put all your eggs in a single borrower’s bucket. At a time a lender should lend to at least 3-4 borrowers to mitigate risk. The ticket size (amount given to a single loan applicant) of new investors should be minimal. By spreading the principal amongst different borrowers from different interest rate spectrum, one not only lowers the risks but increases ROI.
Diversify across platforms
Last but not the least investors can reduce risks by making use of different P2P platforms. There are several RBI licensed P2P platforms which the investors must make use of.