7 Tips for Young Professionals to Get the Most Value out of Peer Lending

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People are often skeptical of new investment opportunities; much confusion arises. It is bound to happen. So, I’m going to make things simpler for you.

How would you like to invest in something with low risk yet high returns?

There is a way to earn high returns on your investment yet bear significantly low risk. And that is what peer to peer lending is all about.

What is Peer to Peer lending?

Peer to peer lending is the new and fast growing financial model. The p2p lending platforms bring together borrowers seeking unsecured loans and investors seeking high rates of returns on their investments.

Since these companies operate digitally and through the Internet, they are able to run at low overhead costs and charge lesser fees than banks. As a result, borrowers are able to obtain low interest loans and investors get high returns. Thus, peer to peer lending is one of those investment opportunities which has lower risk and higher returns than traditional banks.

Even though P2P lending is associated with high returns, you will have to be smart about your investments to be able to reap those high returns.

Below are a few tips to get you started when lending your hard earned money which would help you gain better revenues along with a peaceful mind.

  1. Do your research

This is not something to be lazy about. After all, it’s about the safety of your hard earned money. Before investing your money, do a little research about the lending platform. Though it is certain that past performances are not a guarantee about future yields, yet one can say that a platform which has operated for at least one to two years will have gotten rid of the operational flaws and technical bugs. You may consult with other investors too for an opinion or suggestion.

Also once you have decided to invest in a particular company, the loan track record of the company needs to be studied. Aspects like – their percentage of defaults, their process of screening borrowers, the returns that previous investors have produced and their process of handling late payments and defaults must be known. This is a precautionary step and will help you in your decision making and securing your money.

  1. Diversified investments

This is one of the most important tips, which you will find almost everywhere. The wisest thing to do is to divide your entire investment into smaller amounts and invest in a number of loans rather than a single loan.

This reduces the risk of default, protects and secures your investments, and also helps you to have a diversified portfolio which can better absorb any unpleasant shocks. Even if one of the loans default, your entire investment will not be wasted along with it.

  1. Check the borrowers individually

This may sound daunting and painstakingly time consuming, but it is worth it. Even though there may be hundreds of borrowers listed, it would be wise to know their details before picking a borrower to invest in.

You should analyse the different profiles of the borrowers fully before lending the money. Repayments are easy and convenient when your money is lent to better and more secure profiles.

  1. Invest slowly

Patience always pays off. Do not be in a rush to enter the market and loan large amounts of money. Start off slowly and take the opportunity of investing small amounts gradually.

Investing small amounts in the beginning will give you time to understand the platform and prevent you from making costly mistakes. On the other hand, if you start off with too much before really understanding the mechanics of peer to peer lending, you may be overwhelmed.

  1. Know your appetite for risk

As is the case with any other investment option, you may get higher returns if you are willing to accept higher risks. But, that shouldn’t be the only guiding factor for you to invest your money.

Know the level of risk you are comfortable with and always keep in mind the consequences of the loan defaulting before investing.

  1. Keep an emergency fund ready

When starting off with investing in P2P loans, make sure that you do not invest all the money you have. Keep a strong emergency fund ready with which you would be able to meet your own personal expenses.

Because once you invest your money, you won’t be able to withdraw it from the P2P platform as and when you want.

 

  1. Reinvest your earnings

After having done all the steps above and investing your money, you would be receiving returns in the form of principal along with the interest. Do not let these gains and profits sit idle in your account. By reinvesting these gains, you will be able to make the most of your investments.

So, keep reinvesting to expand and improve your profits and gains. This is similar to how a snowball gets bigger and bigger as it is rolled over snow.

The above tips would help you stay grounded. Follow them wisely, keep learning from your mistakes and avoid taking on more risk than what you are comfortable with.

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