For investors looking for a greater yield, peer to peer lending as an investment is a smart move. As savings and bond rates increasingly fail to deliver and outmoded systems make old school investing a chore, peer to peer lending – with its high ROI and excellent accessibility – is clearly on the rise.
When we say that it's clearly on the rise, we mean it. According to the research done by Valuates Reports, the global peer-to-peer (P2P) lending market size is expected to reach more than 550 Billion USD by the year 2027. That would mean a significant 29.7% CAGR rise!
Now it's as good time as any to get into peer to peer lending, but for newbie investors or those just starting to diversify investment portfolios, the switch can be daunting. Getting started in peer to peer lending can be a difficult proposition.
If you’re thinking of trying a new form of investment and want to know how to get started, this guide will help you get to grips with peer to peer lending, so that you can make an informed decision when investing your money.
But before we begin, let's get something straight - in case you still confuse peer to peer lending with crowdfunding, here's how they differ.
1. Know your goals
Before embarking on your peer to peer investment journey, you’ll need to map things out. Think about exactly what you’re looking for – a small, quick-fire return with minimal risk? Or a slow burn, long term masterplan, involving a deep learning process, regular performance analysis and a nuanced, diverse investment portfolio? Or somewhere in between?
Whatever your goals are, it’s important to figure them out before you dive in. And be specific. Map out the numbers, give yourself targets and aim to hit them. How much money are you willing to invest per month? And what’s your total investment limit? How much monthly ROI are you looking to make? And yearly? Factor in the growth you expect to see over time.
Knowing your goals is linked to having patience when getting involved with peer to peer lending as an investment. Keep your goals realistic and small in the beginning – there’s always room to grow and take full advantage of what peer to peer lending has to offer.
In the meantime, use performance trackers to keep tabs on your investments and make changes as and when needed.
2. Don’t invest it all
With investing, it’s easy to get carried away – particularly when you start using a new method and especially when that new method starts to show signs of success. But slow down! There’s a learning curve with everything, from learning to drive to learning to code, and peer to peer investing is no different.
Familiarize yourself with peer to peer lending, get to know the nuances, understand the benefits and risks and get that all important experience before you make big decisions.
Besides, although peer to peer lending is a great way to invest your money, investing ALL your money is clearly not wise – with peer to peer lending or any other form of investment.
If the idea of losing your investment is unthinkable, then think again. You should only invest what you would be ok with losing – otherwise you’re setting yourself up for a financial fall that may prove to be too high.
3. Get to know the peer to peer lending platform
As with any new experience, research is key. Is the peer to peer lending platform well designed and easy to use? What kind of currency does the peer to peer lending platform deal in? What’s their typical ROI? What makes them stand out from the crowd?
Choosing a peer to peer lending platform is an important decision for investors new to the peer to peer lending game. And while there are some great platforms out there, getting the right platform depends on what the investor is looking for.
Whether you’re looking for speed and ease of investment, high ROI, low risk, the chance to invest into a worthy cause or you’re looking for a trusted platform, you’ll need to do your research to find a platform that meets your needs.
Once you’ve made your choice, get to know the platform as you begin to invest. A factor that shouldn’t be ignored is the values of the peer to peer lending platform. Delve into the about page on the platform to discover a little bit more about the service they are offering and what their goals are.
Reviews or press are also key. Although peer to peer lending is a relatively new industry, you can gain some insight into the peer to peer lending platform by finding out about what others think of them and also by discovering a little bit more about their philosophy.
This is great information for potential investors, because it gives them a window into the peer to peer platform as a whole – from how it was created and what it seeks to deliver for the investor.
It’s important to get to know the details of the platform. What kind of ROI/APR is set? What happens if the loan can’t be repaid? What countries is the platform offered in? What currencies are available? These are all important little nuggets of information that you’ll need to find out about before investing with peer to peer lending platforms.
4. Research the borrowers
Before you invest your money through peer to peer lending, it’s important to know exactly who you are investing in. You might have certain criteria you want to fulfil and doing your research beforehand will be key to a good investment.
A large part of mitigating the risk of your investment will rest on your research of potential borrowers. From credit history to debt and income ratio, there’s information available to help you make an informed decision. Many platforms carry out their own research – from financial statement analysis, management quality and underwriting policy to credit scoring processes, loan portfolio performance analysis and data accuracy checks. These platforms do much of the key research for you and only connect investors with reliable borrowers.
When it comes to investing, investors use their heads – processing the numbers and weighing up the risk – but they also invest from the heart. Putting your money into something you care about is a big part of the investment game.
If you’re looking to invest into a worthy cause, delve into the borrower’s story to find out a little more about their aims and values. Are they a business that is looking to help others? Are they looking for funding to help produce a product that will have a huge beneficial ecological impact?
When it comes to investing, you’ll know the general area that you’re looking to invest in. Doing some research can really help to focus your search and make sure you’re investing in something you care about. Whether it’s helping to stimulate growth in emerging industries or investing in the creation of an amazing new technology, doing your research can guide you towards making a satisfying investment.
5. Understand the risk
Take calculated risks. That is quite different than being rash - George S. Patton
With any form of investing there are risks involved and peer to peer lending is no different. With the chance to make much higher returns than stocks, bonds and other types of investments, peer to peer lending obviously brings a certain amount of risk. The question isn’t how to eliminate risk. It’s how to understand it and bring a balance to your investment.
Some peer to peer lending platforms offer unsecured loans, meaning loans are approved without the need for collateral and that payments can default. That’s why researching the peer to peer lending platform’s lender protection process is very important. Aside from this, investing carefully is the best way to balance risk. Starting slow and building your investment, as well as diversifying your investments and always reinvesting loan payments are sensible investment strategies that bring about a good risk/return ratio.
It’s important to understand the risk of using certain peer to peer lending platforms. Since the arrival of peer to peer lending, there have been several scams that have threatened to undermine the reputation and reliability of this new medium. Platforms with no information about their company and how it was formed, no information about its CEO or owner, little or no details about terms and conditions (or terms that constantly change) and with fake projects have sprung up from time to time. This is another reason why researching the platform is crucial.
Another way risk can be lowered is through the nature of DeFi – short for decentralized finance. This new form of finance is based around the idea of returning control of money to the people who own it, rather than a middleman or a powerful company overseeing transactions. With DeFi, the two parties involved in the transaction are in control and the deal is underpinned by.
To fully dive into DeFi, check out our Guide to Decentralized Finance.
While peer to peer lending is seen as a huge shift in the investment game, companies like Raise are taking things further by using blockchain technology as the basis for its platform. As a leading DApp (decentralized app), Raise is part of the wave of DeFi that is seeing a fairer, more transparent and traceable financial system emerge. And, as the technological potency of DeFi grows, so too does its ability to detect and deter scams, leading to a safer financial system.
Anti fraud regulations are a big part of peer to peer lending, as regulators and platforms work together to create a safe, secure environment for lenders and borrowers alike. Peer to peer lending platforms with secure identity verification processes help to make sure investors and borrowers are legitimate.
6. Diversify
Don’t get us wrong, peer to peer investing is an exciting new way to invest your money. It’s accessible, fast, secure and offers a great ROI. But you don’t necessarily want to put all your eggs in one basket, even if it is a damn fine basket!
Like many things in life, diversification is the key. Spread your bets and you’ll stand a better chance.
So, whether that’s setting aside 40% of your portfolio to peer to peer investing, alongside a whole host of other investment formats like stocks and bonds, a good strategy is to cover all your bases… at least in the beginning.
You can fine tune your investment portfolio and make vital adjustments based on results later down the line.
7. Keep track of your progress
Once you’ve made your peer to peer investment, tracking its progress is exciting. There’s nothing better than seeing an investment pay off – on the flip side, if your investment hits a snag you’ll want to know as soon as possible, so you can put things right.
All good peer to peer lending platforms have an investment performance tracker built in, to give you precise data on how your investment is performing. Gone are the days of DIY spreadsheets and part of the appeal of peer to peer lending is the ease of use. This means leaving the job of data analysis to the peer to peer platform.
Monitor your investments at least once a month. This will give you an idea of how your investment is performing. If you have a lower return of investment than expected – because of defaulted loans or otherwise – an accurate tracker will help to identify the problem. Then you can take a step back and adjust your strategy.
Keeping track of the progress of your peer to peer investment also helps to see the overall picture and helps you to set and achieve your investment goals.
8. Be patient and keep investing
Patience is bitter, but its fruit is sweet - Jean-Jacques Rousseau
Like any form of investing, peer to peer lending requires patience from investors, before they are able to reap the rewards. The wisest way to invest is to start slow and figure out the learning curve. Develop an intuition, gain experience and eventually you’ll be able to increase your ROI over time.
After the initial period, during which investors will be finding their feet and discovering how to invest, there’s great potential to earn a passive income from peer to peer investing, with typical APR rates between 6% and 35%.
For more passive income ideas, take a look at our list.
For those out to play the rapid investment game, looking for a quick ROI, peer to peer lending can deliver an excellent, quick return, with a pain-free start up process.
However, the most effective way to make money through peer to peer lending is to take your time, learn the ropes and create a portfolio of smart investments that combine to create a regular passive income flow.
