Lending is a practice that has been around since the dawn of recorded human civilization. It has been a means of transferring wealth into ventures in a bid to generate more wealth, with the trust of being repaid by the borrower.
When an individual or institution loans money to a borrower, they expect to gain an interest when the borrower pays back the loan.
Over the years, lending has taken different forms – student loans, car loans, mortgages, etc. Notwithstanding, the general idea of money lending has hardly changed. Borrowers are either required to pay weekly, monthly, or yearly reimbursements as interests for the money borrowed.
Today, with digital advancements, lending has taken a slightly different front.
With online lending platforms replacing traditional financial institutions, investors have access to higher returns from their investments and the ability to diversify their investments into different industries.
Over the pasts few years, online lending platforms have become hugely popular, especially in European and Asian countries. According to Robocash, more than 64% of European investors have confidence in P2P lending. And it’s easy to see why because peer-to-peer lending delivers a return on investment of between 11% – 14% on average yearly, as opposed to traditional financial institutions.
If you are looking to attract higher interest for your money or are interested in alternative ways of diversifying your investment portfolio, you should consider peer-to-peer lending.
In this article, you learn:
- What peer-to-peer lending is
- How to lend money for profit
- A practical step-by-step guide to begin P2P investing
Without further ado, let’s get into it.
What is P2P lending?
Peer-to-peer lending is a type of investment where investors can directly lend money to businesses or individuals without involving financial institutions. This type of investment is also commonly referred to as social lending or crowdlending.
Peer-to-peer lending or crowdlending has only existed since the early mid-noughties, but in recent years it has drummed up huge popularity from investors and businesses worldwide.
Crowdlending gives small and medium business access to business loans while allowing investors to diversify their investment portfolios to secure larger interest rates for their investments.
Although P2P investments yield higher interest rates for investors, it isn’t to suggest that peer-to-peer lending doesn’t come at a risk. Every financial investment comes with a certain degree of risk, and the same applies to P2P lending. Moreso due to P2P lending being a relatively new online investment vehicle.
Notwithstanding, P2P lending offers you several investment advantages that aren’t common with traditional financial institutions. For example, when you invest with a bank, you have no idea where the bank decides to invest your money. But with peer-to-peer lending, you have the luxury of selecting the loan or project to fund.
Here’s how you can lend money for a profit with P2P lending works.
How P2P lending works
As we’ve discussed, P2P lending lets investors lend money directly to businesses or individuals in the form of personal loans without involving financial institutions.
However, this type of investment wouldn’t be possible without an intermediary – P2P lending platform.
P2P platforms are marketplaces that connect borrowers directly to investors or lenders. A P2P website brings together borrowers and lenders to exchange value.
Lending platforms are also responsible for setting the conditions in the lending agreement; interest rates, duration, creditworthiness, and terms necessary to facilitate P2P transactions.
How to lend money for profit
- You transfer the money you wish to invest in your lending account.
- Once your account is set up, you can browse the marketplace investments to lend money based on the borrower’s data or project.
- You then decide for how long your wish to lend the money. Here you should choose a comfortable timeframe as your money can be tied up in the loan for up to 5 years. You should also know that the longer timeframe you choose, the higher your return on investment.
- After choosing your comfortable timeframe, set the interest rates on your offer.
- Once all the terms are agreed with the borrower, you then transfer the money to the borrower.
It’s important to note that this whole process is facilitated by the platform; including the communication, money transfer, and ensuring that the investors get their interest rate and recoups their capital.
Some platforms may offer a service that automatically saves your interest and reinvests your capital based on the parameters you decided.
Different P2P lending platforms come up with different settings and modes of operation. Some platforms offer higher interest rates than others, while others charge lower transaction fees.
When choosing a P2P platform, be sure to choose the platform that best meets your requirements. It’s crucial to research the various lending platforms and find the platform with your preferred services.
If you are a beginner at P2P lending, navigating your way through the different platforms and P2P lending advice can be a hassle. That’s why we provided this step-by-step guide to show you what you should know before jumping into the world of P2P lending.
How to use P2P platforms to lend money for profit
Read the following step-by-step guide to learn how to lend money for profit on P2P lending platforms.
1. Understand P2P lending risks
It can be tempting to simply go with the crowd or go all-in on P2P investing without carrying out your research.
The truth is – on the surface, P2P lending looks like a sure banker – there’s no way you won’t get your money back, and some more. However, as we’ve mentioned earlier, there’s always some degree of risk involved with any type of financial investment. And with online P2P lending, a lot could go wrong, especially when you do know or won’t get to see the person you are lending your money to.
Whether you are risk aversed or not or you have some experience trading other financial assets or not, it’s crucial to carry out your research before investing your money.
More importantly, you should take the time to understand the risks involved in P2P lending before getting started.
Here are some of the P2P lending risks to consider;
Credit risk: There’s a risk when borrowers can pay the interest accrued or pay back all the money they borrowed.
Though we can advise you to carry out comprehensive research before choosing a borrower to lend money to, the reality is that even seemingly safe investments sometimes go bust.
In the case that loans go bad, lending platforms might repossess or sell the collateral collected from the borrower. On some P2P platforms, there’s usually some form of compensation set aside for lenders to cover borrower risk.
Generally, many lending platforms give lenders access to borrowers’ information to determine the risk and reward of lending to borrowers.
Platform risk: While platform risk occurs in P2P lending, it’s a risk that affects a small percentage of P2P investors. This is why researching P2P platforms settling on a platform for your P2P investment is crucial.
When a lending platform collapses, the risk lenders face isn’t necessarily that they don’t get back their money, lenders may encounter a long-overdue time for recovering their money.
Although lending platforms are required by regulatory bodies to have fully funded wind-down plans or insurance plans for lenders, in some cases these funds are too small to refund all lenders.
Hence, it’s paramount to carry out comprehensive research of the platform you intend to invest your money.
When researching for the right lending platform, look out for platforms that are regulated by a financial body. Also seek out reviews for P2P sites that appear to be profitable, well funded, or well backed by investors.
Risks from fraud: Fraud is synonymous with all types of financial investments – stocks, bonds, insurance, property, etc.
As you well know, fraudsters and criminals are prevalent in financial investments.
Although, unlike other financial investments such as the stock market, the occurrence of fraud is less frequent in the online P2P industry.
Nevertheless, you’ll do yourself a world of good to keep a keen eye for fraudulent activities on a platform.
While we can offer some online lending advice from our experience, we can only do so much. The onus is on you to ensure you are making the right investment decisions with your money.
2. Choose a P2P lending platform
Knowing the risks that can occur with platforms, choosing a platform for lending money for profit should be a slow and steady process – filled with a lot of research and due diligence.
Here are a few things to consider;
- Ensure the platform provides high-yield investment opportunities
- Check the platform reviews for at least a three-year track record
- Make sure the platform’s terms and conditions are satisfactory
- Ensure the platform guarantees the safety of your funds
- Inspect the lending platform’s website and investment tools
- Determine the platforms underwriting process
Do your due diligence in researching the lending platform and also reaching out to platforms’ current users to figure out their experience.
Choosing a platform is a tedious process but a necessary step before getting started with P2P lending. Nevertheless, there are tonnes of excellent P2P lending platforms that deliver as they promise. Your job is to find the best P2P lending platform for you.
3. Invest in loans
P2P allows you the chance to diversify your investment portfolios across different industries through lending. As an investor, you may decide to lend money to businesses or individuals working on a vast variety of projects – real estate, agriculture, restaurant, startups, personal loans, etc.
However, as a beginner, it’s best to take things slow and steady. You should avoid taking on too many risks.
You may start low-risk lending such as consumer loans. These types of loans typically generate a low return on investment but do so in a faster timeframe.
As you become more knowledgeable and experienced with P2P lending, you should look to take advantage of investment opportunities by reinvesting your profit.
4. Diversify your portfolio
One of the advantages of investing in P2P lending is the unlimited choices of investments; whether consumer loans or business loans. Investments are spoilt for investment choices.
And the old saying goes “never put all your eyes in one basket.” This applies broadly to any type of investment. And the same applies to P2P lending.
When starting out, look to spread your investment to several borrowers instead of lumping all your investment on one borrower.
Savvy P2P lenders, not only diversify their investments on different opportunities on a platform but also invest across different platforms -taking advantage of the different interest rate offerings.
However, invest with caution by doing your due diligence.
5.Track your investment performance
A mistake beginner P2P lenders make is coming into P2P lending with the mindset of making quick cash.
The truth is there is money to be made from P2P lending. And there’s much more than making quick cash.
Great investors always track and measure their investment performance and find ways to generate more income.
In a similar way you track and measure your stock market investments or retirement funds, you should apply the same mindset to P2P lending.
P2P lending is a great investment tool for establishing a passive source of income, and if well managed can generate a steady flow of cash.
6. Be sure to fulfill all legal requirement
All types of financial investment have rules and regulations – to ensure the safety and legality of all financial proceedings.
Whether transferring funds to or from your bank, be sure to adhere to all financial and legal laws regarding your dealing on the P2P lending platform.
Typically, you made to required to go through KYC and AML (anti-money laundering) checks before depositing or withdrawing funds from your account.
Although your chosen P2P lending platform vets all borrowers on the platform, it’s important to carry out thorough background checks of the borrower you intend to lend money to.
Conclusion on lending money for profit
P2P lending is an excellent way to generate a steady source of passive income. But if you are new to lending money for profit, you can easily get overwhelmed. Hopefully, this article lights light on your path to your P2P lending journey.