Can Lending for P2P Projects be Interesting for me as well?

Investing in P2P loans

Investing in stocks and cryptocurrencies requires time and commitment. Managers of funds don’t know where to invest, and savings accounts don’t offer interest these days. Every year, because of inflation, those who store their money in their bank accounts lose up to 2% annually. In the next few years, maybe even significantly more? Investing in P2P loans is a possible option to grow your wealth if you know what you are doing.

Investing in stocks and cryptocurrencies requires time and commitment. Managers of funds don’t know where to invest, and savings accounts don’t offer interest these days. Every year, because of inflation, those who store their money in their bank accounts lose up to 2% annually. In the next few years, maybe even significantly more? Investing in P2P loans is a possible option to grow your wealth if you know what you are doing.

1. How does P2P lending work?

Peer-to-peer lending allows investors to put their money on platforms that lend their money to borrowers. The borrowers pay back the loan (P2P loan) with an additional interest credited to the lender’s account.

This is a very simplified definition of P2P investing. Each P2P platform has a slightly different structure. Overall, the P2P platform helps to connect the investors who want to invest their money with people who want to lend money.

The loans are funded by the crowd of investors, compared to the traditional setup where banks provide the funding.

2. How to invest in P2P loans

Investing in P2P loans is generally not difficult. Most P2P lending platforms allow you to set up an investor account within minutes and deposit the money within a few hours. Before doing so, it is advisable to learn about the risks associated with P2P loans.

Apart from becoming aware of the risks, you should consider the following three points to answer the question whether P2P lending can interest you as well.

2.1 Define your financial goals

As with any investment, you should know why you want to invest in P2P loans and what role P2P loans play within your investment portfolio. Try to determine the answers to the following questions.

  • How long do you want to invest?
  • How quickly do you want to access your investment?
  • What is your expected rate of return?
  • What percentage of your money do you want to invest in P2P loans?
  • Why do you want to invest in P2P lending in general?

This will help define which platform is right for you. Some platforms allow you to withdraw your investment within hours, others may lock your investment for several months. Once you know the answers to the above questions, your P2P lending strategy will certainly become clearer.

2.2 Evaluate your individual risk profile

Evaluating your risk profile is one of the most important points – whether you invest in stocks, ETFs or P2P lending. Be aware that P2P lending involves certain risks and that you could lose some or all of your money.

When you invest your money on the P2P platform, you may feel the urge to check your portfolio every day to see if any loans are delayed. After some time, you should learn that this is of no use to you. P2P lending is a great way to earn passive income (under normal market conditions) – don’t treat it as day trading. Loans will be delayed, some might even default. Therefore, you should also invest in real estate secured loans or loans that have a mortgage as collateral.

2.3 Diversification options

Some platforms allow you to diversify across multiple countries and loan types, while others focus on a specific region or loan type. The more diversification options you have, the lower the risk of loan default. Investors who plan to invest a larger sum in P2P lending should consider investing on different platforms.

2.4 Liquidity

If your goal is to invest in real estate secured loans or business loans, you should not expect to be able to withdraw your money so quickly. If liquidity is your priority, it tends to make the most sense to look for short-term loans or personal loans on platforms like Mintos, PeerBerry, or Robocash.

2.5 Choose the right platform

Last but not least, you want to invest in a trustworthy platform that will protect your investments and generate the returns you expect. There are a few things you should look for when choosing the right P2P platform.

Take a look at the platform’s performance. What is the average interest rate, how many investors are active, how many loans have been funded, etc. These statistics will give you a good idea of the platform’s performance.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.