What Is Peer-To-Peer Lending?
Peer-to-peer lending is a form of investment that matches lenders to borrowers directly, rather than through a financial provider such as a bank. The benefits are to effectively ‘cut out the middleman’ and thus provide a lower rate for borrowers and a higher rate for savers.
Peer-to-peer lending should be considered as an investment rather than traditional savings and it is becoming more and more popular as a strong alternative to traditional borrowing.
In terms of process, peer-to-peer lending is relatively simple as an investor will be matched with pre-qualified borrowers, and it’s entirely up to the investor how much to invest/lend. A good analogy for peer-to-peer lending is ‘financial matchmaking’ – and it’s easy to see why because an intermediary (a website, or platform) will ‘match’ the relevant parties.
Peer to peer lending is used to fund a number of different financial products, such as:-
Tips for investing peer-to-peer
1 – Know The Risks
The first rule of investing will always be to protect your investment – and investing peer-to-peer is no different. The lender needs to fully understand what they are lending against, consider the risk profile, and make a judgement based on their own investment goals.
As with any investment there is always a risk, in this case the risk element is that the borrower will default on the loan repayments and the investor will not get paid.. Each peer-to-peer lending platform will have different measures to mitigate this (and other) risks so ensure you’re fully aware of all the processes involved.
2 – Set Your Investment Goals
Although all lenders/borrowers are closely vetted, it is important for an investor to narrow down their options primarily by deciding on a few key goals, such as:-
- How long you want to invest for – long or short-term?
- What returns you are looking for – safe (lower return) or riskier (higher return)
- How much you want to invest
- What you would look for in a potential borrower
With your investment goals set upfront, it should be easier to narrow down your search, thus saving time and increasing efficiency.
3 – Start Small
For those new to investing peer-to-peer, the best advice is to ‘test the waters’ by investing a small amount and over a short-term. This will bring the lowest return, but also the lowest risk, whilst giving a chance to see if investing peer-to-peer is for you.
You may find it exciting – or a hassle – and without much money at stake, it’s perhaps the surest way to determine if investing peer-to-peer suits you.
4 – Check Your Platform
As investing peer-to-peer is innovative, the market is developing fast with more and more sites joining the market regularly. However, like any business decision, it’s worth looking into the market and researching thoroughly before committing.
Investing peer-to-peer relies on a platform – often a specialised website – and it’s easy to check their past performance, reputation and credibility.
Look into criteria such as:-
- How much have they successfully lent?
- How many active lenders do they have?
- What fees do they charge?
- What rates do they offer?
- How do they deal with bad debts?
5 – Understand The Process – Especially For Large Sums
If you are considering investing peer-to-peer with larger sums, be aware that no interest is paid whilst cash is waiting to be lent out. This is important because you don’t want your money tied up for too long without being lent and therefore not earning you interest.
It could take weeks in some cases to match a saver to a borrower for a large sum, so consider the best way to pay money in. It’s possible to accelerate lending of larger sums, but it may involve reducing the rate.
6 – Don’t Forget Your Own Research
The fail-safe way to check anything these days? Google it!
- Look on forums, review sites, and for satisfied customers that will recount their experience of investing peer-to-peer.
- Read up on financial blogs and newspapers about investing peer-to-peer.
- Who do the consumer sites rate highly as the best peer-to-peer lenders?
- When you’re communicating with any potential peer-to-peer lender, ask for testimonials from previous borrowers or savers.
- Ask friends, family or work colleagues if they’ve ever invested peer-to-peer, what their experiences were and what they’d recommend?
7 – Know The Regulations
Although investing peer-to-peer is relatively new, the Financial Conduct Authority protects investors who are using peer-to-peer sites.
These regulations cover how information is conveyed, the financial reserves firms must have and most of all, clearly state the risks of investing peer-to-peer.
These regulations are there for everybody’s protection, so any peer-to-peer lenders should be forthcoming in demonstrating their adherence to them
Conclusion: Investing Peer To Peer Can Be Very Profitable – If Done Correctly
Whilst any investment needs careful consideration, it’s clear that investing peer-to-peer can bring healthy returns and is an innovative concept.
However like any investment, it’s not without risk. Hopefully with these seven tips to help you get started, it may just be exactly what you’re looking for to increase your returns.
So why not look into investing peer-to-peer today, keeping in mind these seven wise tips and who knows, you could be well on your way to your first successful peer-to-peer investment.