Handling Peer to Peer Lending Risk

P2P lending is a new age investment asset class that has revolutionized investing in the country. In many countries, it is more popular than banks.

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Tony Taylor

Co-author

Peer to Peer Lending

15

April,19

What is Peer to Peer Lending?

Peer to peer lending is the process of lending money to individuals or businesses through online lending platforms. Any individual investor or financial institution can become a lender of peer to peer lending and earn interest paid by the individual or business who has borrowed money.

Peer to peer platform is taking the banking model and revamping it entirely to create a favorable lending and borrowing climate. Peer to peer platforms function completely online, hence lenders can earn a higher rate of interest on their investments and the borrowers can get better rates.

How does Peer to Peer Lending work?

An individual or business who is looking for a loan goes to a P2P platforms like KeyStartFunds to borrow money. Once the borrower is approved and listed, individual and institutional lenders can lend money to that borrower.

Once the borrower gets funded, he/she starts to make repayments every month. These repayments cover principal and interest which the lenders receive.

Is peer to peer to lending safe?

Similar to other investment asset classes, Peer to Peer lending also involves risk. The risk is highly dependent on the P2P lending platform and their credit policies which determine the quality of the borrowers. However, the risk can be minimized by following guidelines suggested for regular lenders.

How to reduce risk in P2P lending?

Here are the most effective methods to reduce risk in peer to peer lending:

  1. Check for credit verification process
  2. Diversify your funds into many borrowers
  3. Do your own due-diligence
  4. Invest through platforms which assist in loan recovery

How is Peer to Peer lending better than other investment assets?

P2P lending is a new age investment asset class that has revolutionized investing in the country. In many countries, it is more popular than banks. Based on a simple idea of lending and borrowing, P2P Lending platform uses cutting-edge technology to connect borrowers looking for quick capital injection to lenders looking to earn high returns. Such has been the surge in investments through these platforms that regulators couldn’t help but notice it, and in turn, started regulating it. If you aren’t well versed with P2P Lending and it’s functionalities.

Now, let’s look into why you should invest in P2P Loans:

Unlike the highly volatile and unpredictable equity (stock) market, P2P Lending is much steadier and dependable. As a result, this asset is comparatively less risky which fits the bill for investors of all risk appetites and classes.

However, that doesn’t mean it’s plain sailing all the while. Defaults are the biggest hurdle that investors have to overcome. Although, that can be mitigated by the right diversification of your investment corpus. For instance, if you divide a $10,000 sum in hundreds of loans, it will significantly reduce your risk margins.

Let us explain it by a simple example. Eg. At KeyStartFunds platform, if you invest in 100 loans, there could be a possibility of 3 borrowers going bad. This is based on our historical default rate of 3%. Considering our weighted average returns of 25.50%, you will lose approximately 3% of returns on your investments. Still, you will make handsome returns of more than 40%. All these calculations are illustrative and simplified for explanation purposes. The exact calculation may vary by 1-2%.

The most exemplifying feature of investing in P2P loans is the monthly returns that investors gain. Investing in any other instrument blocks both of your returns and your capital for a specified period of time, which can vary from months to years. Here, you get your investments back every week/month!

The second most exciting thing about P2P Loans is the simplicity of the instrument. You don’t have to be an Einstein to understand and succeed in P2P Lending. It’s just as simple as buying groceries, really! You must have seen a family member or relative availing a loan which gives you a rough idea of the mindset of borrowers looking for personal loans.

Leverage this understanding of humans and start lending to verified borrowers now.

Author

Sally Marx

Loves investment and writing about it, cherishes Australia