Richard Litchfield is from peer-to-peer (P2P) lending platform Lending Works. Here, he shares his tips for how you can be at the top of your game in this alternative finance market.
With interest rates stagnating and figures for September 2018 showing that 99% of savings accounts are failing to beat inflation (Moneyfacts.co.uk), it’s no surprise that more and more people are turning to the alternative finance market to make money. In particular, P2P lending has seen a rise in popularity over the past few years, with it now holding the largest market segment.
When it comes to investing in anything, there will never be a guaranteed no-risk opportunity. However, there are some steps you can take to protect your assets and make a good return. So, if you already invest in P2P lending and are looking to step up your game, I’ve rounded up my top tips to help you succeed.
Choose the right P2P platform
While you might have already established your risk tolerance, it’s key to note that you then need to find a platform that will be suitable. When considering a lending platform, you should look at the performance data of the platform itself. Although performance might have changed since past figures, they’re still a good way to get an insight into the success of the platform, especially if you look at its overall track record.
Most important to you as a lender will be whether the platform has any procedures in place in case things do go wrong. The best lending platforms will offer funds and insurance, as well as having contingency plans in place to protect you, so it’s well worth finding this out before settling. Once you’ve done all of this, it’ll be good to look at reviews from other customers to get feedback from others in a similar position. On top of this, speaking to the team themselves can show you whether they’re approachable and friendly, as well as being clued up.
Diversify your P2P portfolio
To prepare for default payments and to manage your returns, it’s sensible to diversify your P2P portfolio. This can be done in three ways: diversifying the lending platforms you use, as well as the lending sectors and the borrowers you target.
When diversifying lending platforms, it’s key to acknowledge that nothing comes without risk. However, all platforms will be different so it’s important to do your research to find ones you believe will give you the greatest success. Lending platforms can fail for a number of reasons, such as platform insolvency, fraudulent activity or security breaches. So, to protect yourself from losses, it’s a good idea to spread your investments out among a selection of reliable platforms.
Next, you should be looking into the lending sectors you’re targeting. There are typically three to consider: consumer lending, business lending and property lending, all of which could be affected by unpredictable circumstances. For example, the amount of defaults from consumer lending could increase if unemployment rates rose, while if property prices fell, it wouldn’t be as easy to recover losses from property lending. To avoid these defaults, you should look at spreading your loans across different sectors so that if one has problems, the gain from the other markets will cover you.
This ties in with the final option of diversification: borrower diversification. Just as unemployment on the whole would impact your returns, events that happen to an individual borrower can have the same effect. For this reason, spreading your investments out across a range of borrowers will make it more likely that the returns you get from the reliable ones will make up for any losses from other defaulting borrowers. However, do be aware that not all P2P platforms let you choose your exact borrowers, although they will likely work to spread your loan across multiple ones for better peace of mind.
Use automation to reinvest
There are many reasons you may want to manually handle your investments and portfolio, however, allowing the lending platform to automatically reinvest your earnings can save you time and multiply your returns.
Instead of logging in to micromanage all of your earnings from repayments plus interest, the best P2P platforms will have an option for automatically reinvesting in similar loans, saving you time and ensuring your cash is not idle. This can usually be set up relatively simply and left to do the work for you until you prefer to take over again.
Peer-to-peer lending can seem difficult, but with my top three tips, some smart thinking and patience, you’ll be well on your way to making some extra income in no time.