P2P is just like any investment, you need a good understanding before delving into it. P2P platforms are fast growing in popularity and acceptance. However, just like any investment, there must be a risk. More recently, Chinese state-owned asset management agencies had to bail out P2P platforms with bad loans. In such a scenario, the investors would have lost it all if the government haven’t intervened.
The thing is; P2P platforms are growing and gaining roots worldwide, you just have to do your due diligence as an investor to be on the safe side. The awkward difficulties of obtaining loans from the traditional banking system is fueling the growth of P2P platforms. Of course, it’s a sure way of investing your surplus capital. However, being a system that gives out uninsured loans, there are huge risks involved despite the amazing returns Peer to Peer investment offers.
These risks cannot be totally avoided, but with the right guidance you can make a good kill from Peer To Peer lending platforms. This is why we’ve outlined 7 key criteria to always factor into your choice of Peer to Peer lending platforms. One thing this article won’t be doing is recommending any crowdlending platforms. You should be able to make this decision after reading through.
- Buy Back Guarantee
This is arguably the biggest consideration you should have as an investor before pitching your tent with any P2P platform.
What is really buy back guarantee?
A buy back guarantee is given by a loan originator on a specific loan. Remember how peer to peer lending works, it’s an unsecured loan. What buy back guarantee does is that, if there is a default on the loan for a specified period, the loan originator is obligated to repay the loan.
You definitely know who a loan originator is right?
Let’s assume you don’t. A loan originator is the channel through which the borrower accesses the P2P platform. Usually, the loan originator is expected to vet the borrower before his request is considered and granted by any investor.
One thing before we go ahead, know that any platform with a buy back guarantee will rarely have high returns. It’s a decision you have to make; whether you should choose high returns or low risk investment.
The reason is simple; with buy back guarantee, the loan originator is taking upon themselves a high level of risk. Which is why the gets the lion share of the interest accruable on the loan.
In essence, you need to consider whether you prefer the low risk involved with buy back guarantee or stick to the high returns you are likely to get (or may not get) .
- Strength and Credibility of the Crowdlending Platform
From 2005 when the first crowdlending platform surfaced till now, there have been a fast growth in the industry. The level of growth is beyond what was experienced by the banking industry, this unprecedented growth can only be compared to the growth of the internet.
What are we saying?
There are thousands of P2P lending platforms out there and a good number of them will disappear in no time. Not every of these platforms have the expertise and experience needed to sustain the system. It will get to a point when they won’t be able to control the level of defaulting loans and will have to declare bankruptcy.
Perform your due diligence on any p2p platform you intend to invest with. Most importantly, pay attention to the environment they are operating from, the government and financial regulations guiding them and the credibility of the team behind the platform.
Most importantly, seek to know the investor protection policy they have in place. Don’t just join a platform on the basis of the high returns being offered. You need to be sure the platform can protect your fund at all times.
Look at the year of establishment to the results they’ve made, a platform with 2 years under their belt and 20% default rate isn’t one you should invest with.
- Investment Options and Diversification
Crowdlending platforms usually grant loans in three key areas;
1. Consumer or Individual loan
2. Business loans
3. Real estate/mortgage loan.
This is simple, every P2P platform will choose one or more of these areas. Usually, the real estate development niche gives the best returns but not without it own risk. What if the real estate project fails?
When choosing a P2P platform, you should seek for one that isn’t about just one area. Atleast two will give you cover and this should guide your investment decisions also.
Don’t choose a P2P platform that only permits you to put all your eggs in a single basket. Go for one that gives you option to diversify your investments. There are some P2P platforms that are involved in all the three sub-industry and even more.
Check out those ones with multiple investment options. With this ones, you can be sure that your risk are diversified. It’ll only a rare scenario will all of the investment options fail at once. If one fails, you can always find solace in another.
- Return on Investment
We may act as if it’s not important but it is actually. You are thinking of going into crowdlending because of the returns you hear it offers. Having considered other factors that deals with the security and safety of your funds as an investor, it’s proper to assess what you can get from crowdlending as returns.
On an average, most P2P offers an average return of 10% to 15%. The lowest we’ve seen is around 6%, while the around is a little above 20%.
You should know that the higher the average returns, the higher the risks. This is not always the case but it’s always tenable in most cases. Most platforms that offers high returns do to have in place any protection for your funds as an investor.
Be on the lookout for P2P platforms that balances high returns with adequate security measures for your investments. It’s better to go for a 12% return than go for 25% and lose it all.
Try to maintain a balance between risk and reward. When the reward is high, it’ll definitely come with greater risk. It’s your choice to choose as an investor the level of risk you are ready to take.
- Investment Options
The investment options are different across different P2P platforms. Investment options can be categorized into three options across all platforms. First is the automatic or managed option. In this option, you just have to click “Go” and the platform does the rest for you.
You won’t have to do anything. All you have to do is just choose which of the loans you would love to invest into and the platform does the rest for you. The second type of investment is manual. You choose investment along the line of specific criteria the choosen investment should possess. This is based on filters that guides the selection of investments.
The last option is the least used option. It involves the use of API. For this third investment, you would require a technical knowledge to make any meaning from the investment. If you have the needed time to learn the technicalities, you can make a good return from your investments.
The investment option of a platform should guide your decision. Imagine choosing a platform that is based on an investment API, you would have issues staying on top of your investments.
- Minimum Investment Entry and The Fees
You need to be aware of what it cost to invest in a platform. This is a two-way thing, the minimum investments and the fees charged by the platform. There are some P2P platform where the minimum investment is as low as €1, while there are some that the minimum investment is as high as €1000.
So also, there are platforms who charge as high as 10% of the investment fees. They also charge on deposits and withdrawal. They call it management fees, which usually applies when you are about to make a withdrawal. This is why you are advised to adopt a holistic approach when choosing the platform to invest into by considering the minimum cost and the fees of investment.
With a holistic view, you’ll know where to invest, when to invest and how much to invest. You’ll have to consider the average returns in tandem with the fees deductible from the returns.
- Existence of a Secondary Market
What’s a secondary market again?
We’ll explain. Most platforms have a secondary market and many investors are unaware of how it works. Before you choose any platform, you need to know how long you can weight for the terms of the loan to run out. What if you need your funds out even before the terms run out? That’s where a secondary market comes into the picture.
Let’s further explain how a secondary market works using unsecured loan. If the loan is 38 months, where the borrower is expected to pay monthly. May be after 20 months with 18 months to go, you can decide you are done with the investments. How will you then cash out your fund with 18 months to go?
This can only happen via the secondary market. You’ll list the loan for sale on the secondary market for another investor to pay you off and take over the loan. Think of how long you can stay before investing in a loan.
Most times, a personal emergency may arise and the secondary market will bail you out.
There you have it; all of the most important conditions that must be met by a crowdlending platform before you invest. All of these conditions are important and must be considered.
It will be difficult to find a P2P platform that possesses all these conditions. Just find one that possesses all you require of all of these conditions.