Lending money is a risky affair. However, there are ways to minimize the risk. Since peer-to-peer (P2P) lending is a relatively new concept and the RBI regulations for the P2P sector are barely about a year old, here are five effective ways in which you can reduce the risk to ensure getting your money back. Of course, with interest.
Understand the platform
You should try to understand how the online P2P model works before lending money on it. An investor should be aware how the money is lent on the platform and what are the risks involved in lending money on the platform.
Do not hesitate to ask the P2P player about the overall volume, defaults, recovery process and likely returns. You can do your own research or simply contact the P2P company through emails, chats or phone calls.
Do not go overboard
Sure, P2P platforms can offer your higher double-digit returns. But that doesn’t mean you should lend your entire savings on a P2P platform. “Don’t put your entire saving in P2P lending. Choose the amount you wish to invest and then diversify,” says Raghavendra Pratap Singh, Co-Founder, i2ifunding.
Split money among platforms
If you are planning to lend money on a P2P platform, it is always better to start with smaller amounts. Also, try to divide the corpus among various investment options and P2P platforms. “One should start by investing on four to five websites,” adds Singh.
Diversification is essential both among platforms as well as within a platform by choosing a diverse borrower profiles. “More the diversification, the less the chances of principal default. One should choose to select as many borrowers as possible, that too across interest rate spectrum. It will average out returns as well as risk,” says Bhavin Patel, Founder and CEO, LenDenClub.
Choose the borrower wisely
One should understand the profile of the borrower s/he is lending money to. Keep a close watch on financial details like borrower’s average bank balance, quarterly bank balance, income tax return besides the salary or income mentioned.
One should also clarify with the P2P platform regarding the borrower’s family background, number of dependants and educational background before going ahead with the loan.
“Factors like city, gender and employment status can considerably alter the net returns. Among women borrowers, the default is lower by around 50 per cent. While male default percentage stands at 3.5, it is around 1.85 per cent among females,” says Singh of i2ifunding.
Choosing an experienced platform will also help. “If the platform is into business for a longer time, they will have all required support in place; be it collection support, legal support or customer service support,” adds Patel.
“Try to remain invested for a reasonable period like 1.5 -2 years and keep reinvesting the returned principal. This strategy will get you compounding effect on your return and may overachieve your return expectation,” says Patel of LenDenClub.
If you are planning to invest in P2P lending, wait to see results for an initial period of 3-4 months and then slowly increase the exposure. You will gain more knowledge about P2P lending and it will help you to deploy better investment strategies in the future.
There are broadly two types of risks in P2P lending: intentional and capability risk. A default may occur because of the borrower’s lack of intention or his ability to pay the loan. Investors should know about the recovery process and action taken in case of fraud before they try their hand in this space.
Credit : The Economics Times