P2P lending is a trending topic among investors. If you’ve been following my financial journey, you might know that I’m a passionate investor on the P2P lending platform Ratesetter. If you’re new to my site, read how Ratesetter is helping me increase my passive income here.
Every investor knows that a diversified portfolio is the only way to protect your investments from defaults. Well, the same applies to your P2P portfolio, and while Ratesetter proved to be a reliable platform, putting all of your savings in one pot isn’t recommended.
In order to minimize the risk of your P2P investment, it’s good practice to invest on several P2P platforms. There’s an issue that comes with this approach, however, and that’s because there are tens of P2P platforms and it’s hard to know which are trustworthy and which aren’t.
In today’s article, Jakub Krejci, an experienced P2P investor, offers his first-hand advice on how to choose the right P2P platform, so you can maximize your returns and minimize the risks of default. For more details, visit Jakub’s P2P investment blog, where he shares his experience with various platforms.
Define Your Strategy
First and foremost, it’s important to define what your financial goals are. To help you work these out, have a think about how you’d answer the following questions:
- How long do I want to lock my capital?
- How much do I want in return?
- What risks am I willing to take?
- How much time do I want to spend investing?
There are dozens of platforms that you can invest in, but none of them offer the same service. To work out which P2P platforms are best suited to your needs, think about the following factors:
- Liquidity: How fast do you want to access your money?
- Returns: What is the expected return within the investment period?
- Risks: How do you want your money to be secured?
Functionality and Usability
Before choosing a platform,have a look at their offerings in terms of functionality. You’ll want to keep an eye out for a platform that offers the ability to withdraw your capital, automate your investments and offer enough loans.
Ideally, you want to have the option to access your funds in case you decide to withdraw your capital before the end of the agreed investment period. You can find out whether this is possible by checking if the platform offers a secondary market.
If your goal is to create passive income with P2P lending, you should also look for a feature that allows you to automate your investments based on your preferences. Many P2P platforms refer to this feature as ‘auto invest’.
Finally, P2P platforms sometimes struggle to find enough loans suitable for financing, so you want to choose a platform that meets your demands in terms of the number of investment opportunities available. . To find out whether a platform suffers from cash drag, read some of the investor’s reviews on the internet.
Risk and Returns
When choosing a P2P platform, make sure you’re aware of the protection that comes with your investment as this highly influences the returns you’ll earn.
In order to do this, bear the following in mind:
Most of the platforms offer different protection for your investments. If you’re investing in personal loans, your investment isn’t secured by any collateral.
In most cases, P2P platforms offer a protection fund or a buyback guarantee. This fund helps to cover potential defaults.
Some platforms that specialize in the financing of real estate or business projects list loans that are backed by property, personal guarantee of the borrower or other forms of collateral.
Statistics and Track Record
When choosing a P2P platform make sure you have a look at their track record.
Many platforms have been on the market for several years, while others have just started out.
It’s worth noting the age of the platform as those that have been recently founded have a significantly higher risk of suffering from cash drag, poor customer support and a lack of functions.
Key performance indicators, such as the number of investors, the number of funded loans and the paid out interest will give you a good idea about the platform’s performance.
Although past performance doesn’t guarantee future outcomes, it will give you a good indicator of the platform’s track record.
Being able to evaluate the risk of a platform isn’t something you’ll learn overnight. There will always be risks that you, as an investor, won’t be able to control. Choosing the right P2P platform, however, is a good practice that will help you decrease potential risks and increase your returns.
At the end of the day, your aim with P2P lending is to create a sustainable passive income stream, and the above tips will help you achieve this.