Did you know that the practice of lending and borrowing dates back to prehistoric times?
Since then, it has taken many forms and has been developed by various types of institutions. But the core of this concept has remained the same.
It has always been someone who needs money at one end and someone who has money and is looking forward to invest it. Although the essence of lending has been the same, there have been many changes with other important aspects of lending.
The recent and trending innovation in this field is P2P lending which has been attracting many people all across the world in the lending and borrowing aspects. This method has been proven to be a better way to circumvent the traditional banking system which has introduced new doors and spectrums. The peer to peer lending platforms provide a market place for loans.
This is a good online investment platform because one can get extraordinarily high returns in the range of 12% to 36%. The investors can have a diversified option to invest in different categories of the borrowers which are according to the risk appetite so that one can avoid keeping all their investment in one basket, which can increase borrower specific risks.
The most important feature which makes P2P a good investment platform is that the principal amount remains intact even in the worst possible scenarios where the investors will get the invested amount in case of a default.
Those investors who are in need of periodic payments can also find this option lucrative since monthly EMIs are credited directly to the bank accounts. Since the process is online, there is a lot of transparency and the contracts are bound, i.e. there is an offer, agreement and consideration. The investor will also know as to where the money is being invested and for what purpose it is being used.
Moreover, the post-dated cheques are collected in advance so that they can protect the interests of lenders. There is ample risk assessment of borrowers which includes physical verification, credit history, income verification, credit scores, payment behaviors, etc.
Investing through a P2P platform can work well if the investor understands the risks. A smart approach is to use P2P investments in order to supplement the fixed income portion of the investment portfolio.
For example, if an investor holds 30% of the portfolio in interest-bearing investments of varying maturity and is earning around 3%, the investor can increase the overall rate of return on the fixed income allocation from 3% to 3.6% by investing 20% of the fixed income allocation in P2P loans which earn an average of 6%.
The investor should make sure that he/she steers clear of investing all the fixed income allocation into P2P loans because by doing so, one can take an excessive level of risk.
The P2P lenders are at a pro end because they have many advantages while lending in P2P platform like:
- The lender can be an institution or an individual.
- There is no paperwork when compared to other institutions like banks.
- It is easy and simple to open an account through online lending platforms.
- The investor can also lend small amounts to one borrower.
- The investor can decide as to how much he/she wants to lend and to whom.
- The investor receives monthly payments of the loan amount which includes the interest payment.
- The investor can diversify the money into many different loans.
- When compared to bank loans, the average returns are much higher.
- The investor can decide for himself/herself if he/she wants to reinvest or withdraw the money which they have earned.
The bottom line is that the P2P investors need to be careful, patient and also willing to invest in low risk investment option. If there is persistence, the investor can quickly see if a particular platform can outperform the traditional investing loans.
One should carefully consider the pros and cons and start slowly. When the investor sees the result, he/she can then determine for himself/herself if investing in a particular platform was the right choice, or not.
It is expected to appropriate 15-20% of the investment portfolio of the investors in the next few years. Since the regulation of P2P, there will be an increase in investor activity and also in the size of funding. This will result in a strong and well-funded P2P eco system capable of competing with the traditional banking segment as well as existing players in the global market.
If you think that P2P lending is your cup of tea then now is the time to get started.