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7 Quick Tips for Investing in Peer-to-Peer Lending

Peer-to-Peer (P2P) lending refers to an online marketplace through which ordinary individuals can issue unsecured personal loans to other individuals. This eliminates the intermediaries, and subsequently, the lower costs involved, make P2P lending an attractive investment opportunity. Lenders get better interest rates, and the borrowers get the loan money in a short period of time. Even though the online portal usually charges a fee, it is quite nominal and is worth the service they provide in return. Here are some helpful tips to get started with investing in P2P lending.

  1. Research
    While the P2P lending sector is nascent in total, it is useful to be able to see the performance the platform has delivered so far, rather than only projections and estimates. Obviously, past performance offers no guarantee about future yields, but a platform that has operated for some time will have eliminated operational flaws and IT bugs that might exist right after the start.
    It's important to remember that not all lending platforms are the same and they all follow different business practices. Different lending platforms will have different procedures for screening, late payments, and defaults.
  2. Start slow
    Reading and research are great, but there is no better teacher than the first-hand experience. In September 2017, RBI issued a notification, passing a mandate for all P2P lending platforms to be registered as non-banking financial companies (NBFCs) and published a set of guidelines for P2P lending platforms. Since then approx. 20 platforms have registered in India.
    Take advantage of the opportunity to lend smaller amounts, even Rs.2,000 per loan. Having a smaller amount invested at the beginning will give you time to understand your lending platform and prevent yourself from making costly mistakes.
  3. Build a diversified portfolio
    Diversification, diversification, diversification. This effectively means that you should invest in smaller loan amounts spread across a large number of borrowers. This will allow you the leverage to absorb any sudden shock arriving from someone defaulting on a loan.
    Diversification not only means that you lend your money to different borrowers, but it also means that the borrowers should have different credit scores, and professions, among other aspects. And it sounds more time consuming than it actually is, as most platforms offer an auto-invest feature.
  4. Lend According to Risk Appetite
    Everyone has a risk appetite, they're comfortable with. You need to know yours before you begin investing. As with all investments, the higher risk usually equals higher reward. Lending to a low-grade borrower will bring in potentially higher yields but greater risk than lending to a high-grade borrower.
    Currently, P2P lending is delivering higher and stable returns when compared to stocks and MFs and should be considered as part of your investment portfolio. Start with 25k to 3 lacs (although RBI has set an upper limit of 50 lacs per lender) depending on your risk appetite and steadily build your portfolio. A long-term investment plan of at least 24 to 36 months is the best way to get good returns with P2P lending as the returns compound with time, increasing the return on investment.
  5. Reinvest your returns
    Do not let your gains and profits sit idle in your account. Take advantage of the compounding yields by continually reinvesting your returns into new loans.
    Since the principal invested in loans comes back every month as part of the EMI, Net Annualized Return (NAR), over a period of time becomes constant or starts to drop. Reinvesting the monthly EMI ensures that NAR remains high.
  6. Plan wisely
    While investing your money in P2P lending or any other approach, it is always recommended to plan wisely. Prudent planning is the key to getting the best returns on savings, overcoming inflation and enjoying financial security in times of crisis. A good mix of all categories is the right approach.
  7. Be pro-active
    Investing with P2P lending platforms is a fairly straightforward process, but you need to take reasonable precautions like the ones outlined above. Be pro-active and be in touch with the relevant news, articles, blogs, and other information sources, so that you do not miss out on the new laws, platforms, and other aspects of the trade.

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