As someone who has been involved in Peer-to-Peer (P2P) lending for some time, I understand the importance of risk management.
P2P lending is a great way to diversify your investments and earn higher returns, but P2P lending can be risky. You risk that the borrower, loan originator, or even the platform goes bankrupt.
In this article, I will provide some tips on how to effectively manage the risks associated with P2P lending.
1. Diversify your portfolio
One of the most important risk management strategies for P2P lending is to diversify your investments. This means investing in a variety of loans with different repayment terms, interest rates, and loan types. This way, if one loan defaults, you won’t have all of your money tied up in one loan.
2. Research the loan originator
It’s important to research the loan originator before you invest. Make sure they are a legitimate company and that they have a good track record of responsibly managing peer-to-peer loans.
3. Research the borrower
Before investing in a P2P loan, it’s important to thoroughly research the borrower. Make sure that they have a good credit score, a stable employment history, and enough disposable income to make repayments.
4. Utilize automated investing tools
Automated investing tools can help you manage your P2P investments by automatically investing in loans that meet your pre-defined criteria.
This way, you don’t have to manually review each loan before deciding to invest allowing you to earn passive income with P2P lending.
5. Use multiple P2P lending platforms
Using multiple P2P lending platforms can help diversify your investments and reduce risk.
By spreading your investments across multiple platforms, you can reduce the potential for losses if one platform experiences difficulties. This is a real risk that has been seen with multiple platforms in Europe, including Grupeer, Envestio, and Kuetzal.
Additionally, different P2P lending platforms offer different borrower types, loan terms, and risk profiles, so investing in multiple platforms can help you create a more diversified portfolio of investments.
6. Don’t overinvest in P2P loans
It is important to not only invest in P2P lending if you want to manage risk because P2P lending is not a guaranteed form of investment.
While it can offer attractive returns, it also carries a certain amount of risk, and diversifying your investments across different asset classes is the best way to reduce risk. This can include investing in stocks, bonds, mutual funds, and even other alternative investments.
By spreading your money across different assets, you can reduce the risk of any one investment taking a large hit, and ensure that your portfolio is diversified in order to maximize returns.
7. Monitor your loans
Once you have invested in a P2P loan, it’s important to monitor the loan to make sure that payments are being made on time.
If you notice that payments are consistently late, it could be a sign that the borrower is having difficulty making repayments and you may want to consider selling the loan on a secondary market.
8. Invest in secured loans
When investing in P2P loans, it’s a good idea to prioritize secured loans. Secured loans are loans that are backed by an asset, such as a car or house, which can be repossessed if the borrower fails to make repayments. This reduces the risk associated with the loan.
For unsecured loans, it can be a good idea to invest in those with a buyback obligation. But bear in mind, that a buyback guarantee is only as strong as the one issuing it.
9. Make a plan and set limits
Before investing in P2P loans, set limits on how much you are willing to invest and how much risk you are willing to take. This will help you stay within your comfort zone and avoid taking on too much risk.
10. Start with a reputable P2P platform
Last but not least, it is important to invest via a reputable P2P lending platform with a strong track record. Some of the most popular and reputable international P2P platforms include PeerBerry, Robocash, and Lendermarket.
By following these tips, you can effectively manage the risks associated with P2P lending and ensure that you are investing in loans that are likely to yield a positive return. As with any investment, it’s important to do your research and consider the risks before investing.