P2P Lending is not a new way of investing, but there are key best practices that newer investors should take into account when considering investments on certain platforms.
Investing in p2p lending can seem like a daunting prospect but it doesn’t have to be. With the increase in marketplace lending platforms offering greater transparency it is now easier than ever to receive higher returns on your investments. Yet there are a few best practices that every investor should take into consideration. So that investors fully understand p2p lending on marketplace lending platforms, EstateGuru has written an Investor Guide to ensure you are making educated decisions. These best practices should be applied to any investment on a marketplace lending platform.
1. Understand P2P Lending Risks
As with any investment, you should understand the risks that are associated with investing. Some marketplaces that exist today for retail investors allow individuals to invest in unsecured consumer credit. Rates paid by the borrowers typically fall below rates which they would pay on a credit card and are typically higher than a secured loan for example on car loans and mortgages. A majority of the borrowers state loan refinancing or debt consolidation as a loan purpose, but ultimately, loan proceeds can be used for any reason.
Investors should be aware of the following when assessing investment opportunities:
- The interest rate expresses the actual risk level behind the loan
- The higher the risk, the greater the interest returned
- No collateral, a higher risk (how will you get your investment back?)
If collateral is provided – then should the investment default, the profits from the sale of collateral cover the loan, interest and additional legal costs, ensuring investors receive their expected returns.
Diversifying your portfolio is a recommended option for new investors. Simply put – the more various portfolios you invest in, the less impact one individual portfolio default will have on your remaining investments. The same should be said about diversifying your markets – operating in different countries surpasses any additional market risks.
A sound investment strategy should always begin with investing in as many objects as possible until your account grows and you begin to feel comfortable doing what you are doing. At EstateGuru we often find individuals that have had a negative experience with a platform lack this key best practice.
Once you have become more of an accredited investor you are in a stronger position to leave your funds invested and reap the rewards of longer term investments.
Although you may initially hand select investments on a platform, you’ll eventually find that this is a time consuming endeavour, especially if you have a large portfolio. To solve this manual process some platforms, EstateGuru included, are offering their own free automated investing tool called Auto Invest.
Simply put, Auto Invest sounds out investments that suit your portfolio (known as an account on our platform) and ensures you do not miss out on golden opportunities to invest in. This automation is completely controllable by the user and can be turned on and off when required.
Automation provides easier, more straightforward and opportune investing and provides the investor with more confidence in their portfolio, minimising risk in the process.
These best practices are meant to serve as a starting point for new investors to understand how to be a successful p2p lending investor. Always examine the information provided on EstateGuru’s marketplace lending platform first before beginning. Once you begin investing, follow these key best practices to reward yourself with returns.