Are you looking for a new approach to invest your money so that you can earn more profit? Peer to peer lending can be a solution for you. However, certificates of deposit and savings accounts are the most commonly known sources for passive income, but you can not earn very much through these sources.
If you want to take your income to the next level, you must consider P2P lending. In peer to peer lending, borrowers use services that connect them to the lenders without any hassle. As an investor, you can get high interest rates. Here in this article, we are providing you with some essential things that you should know before starting P2P lending.
What You Need To Start
To start peer to peer lending, you need two things.
- A P2P Account
Choosing Peer To Peer Platform
The first thing that you need to do is choose a P2P platform. Many P2P platforms are available in the UK, and the interest rate varies from platform to platform. You should shop around and choose a well-reputed platform that offers you the best returns. After choosing a platform, you need to register yourself and make an account.
Once you created your account, you can transfer funds and start lending. You can also set criteria according to which the platform selects borrowers for you. You can lend money to individuals and small businesses. However, keep in mind that P2P loans are unsecured, so your capital is at risk.
Unlike your savings accounts that let you start earning money with any investment, P2P lending requires a minimum investment. The more money you invest, the more you can get the returns. However, you must take into account your risk appetite and invest accordingly.
Your money can be illiquid for some time if a borrower does not match your set criteria. So, you must consider how much money you are comfortable with having illiquid before investing in P2P lending. The interest rates are high, and you can receive returns every month.
When investing in peer to peer lending, you should look beyond the high interest rates. Like all other investments, P2P lending also has some risks, such as the loans are unsecured, you do not have much information about the borrower, and FSCS does not protect your capital. Good lending platforms help you in risk assessment and management.
You can mitigate the risks through diversification. Instead of investing all your money in a single big loan, you can spread it across multiple small loans. In this way, if a borrower defaults, you can still earn a return from other loans you invest in.
Limit Your Investment
It is an essential thing that you should remember, always start from small investments. Because in the starting you may need some time to understand peer to peer lending. Once you understand this type of investment you can increase your capital and earn more profit.
Fees Are A Possibility
Peer to peer platforms provides you with their services that you can earn money in a more comfortable way. Do you know how these platforms earn money? There are a variety of ways. In the starting, some companies take a share from the interest that borrowers pay.
Another way of earning money for these platforms is by charging fees from the investors and borrowers. Thus, before investing with a platform you must consider the fees schedule to find out whether you are okay with what they are charging or not.
High-Interest Rate Means High Risk
When you start lending through a peer to peer platform you will see that you have an option to choose from a variety of loans that need funding. You may think that loans with high-interest rates are the best way to earn more return.
However, you must keep in mind that the borrowers that have low credit scores are offered loans with high-interest rates. In this way, these borrowers carry more risk of default so you should add different types of loans to your portfolio to reduce the risk of default.
Peer To Peer Lending Is New
Although peer to peer lending has been around the country for the last decade, it is still a relatively new investment option. It is difficult to predict how well the P2P loans will perform during a recession. Investors also do not know how new regulations can affect their capital. This uncertainty makes peer to peer lending less safe as compared to other investments like stocks and savings accounts.
Many yield-seeking investors are attracted to peer-to-peer lending because of the high interest rate and ease of investment. There is no middle man involved in P2P lending, and all the steps from making an account to lending money are online. Therefore, it is necessary to choose a trusted peer-to-peer platform to earn high returns and have less risk of losing your money.
If you decide to invest in peer to peer lending, keep in mind all the above-mentioned things so that you can reduce the risk of losing money and make P2P lending a source of passive income.