How to Invest Using Peer-to-Peer Lending

by Mike Parsons Mike is an Australian IT support professional.

Peer-to-peer lending has become one of the most popular forms of investment nowadays. Many choose this over bank loans to resolve their financial issues. However, investors also see peer-to-peer lending as an opportunity to expand their investment portfolio.

In order to better understand what peer-to-peer lending entails and how to invest using it, here are some important facts.

What is peer-to-peer lending?

Peer-to-peer lending is facilitated through companies which pair up borrowers and lenders. These lenders are individual companies which will loan their own money to the borrower. Their decision to loan the money is based on the assessment of the borrower after reading their portfolio in order to mitigate the risks.

The lender can agree to loan part of the sum the borrower needs or all of it. This is why the majority of peer-to-peer loans is financed by several investors. And the money is returned to investors through monthly payments made by the borrower.

Companies that facilitate peer-to-peer loans

Companies that facilitate peer-to-peer (P2P) loans offer certain interest rate depending on the credit score of the borrower. They will also fee for providing their service, preparing the documentation and for penalties if the borrower is late or fails to make a payment. The time to repay the loan depends on the amount but will usually be up to 60 months.

As an investor, you will look for the stricter company since that will guarantee your return on investment. As a borrower, you will choose the company with more agreeable conditions to return the money to the lender.

Set your lending parameters

You can go through each borrower’s portfolio one by one and assess them to see if you find them a good fit for your investment. However, that will take a lot of time especially if you have a lot of borrowers to evaluate. Therefore, it’s best to determine your parameters or requirements a borrower needs to fulfill in order to get the loan.

For example, set the number of credit inquiries you will tolerate in the last six months, but bear in mind that less is always better. Set the filter for the credit card use, from 0 to 60%, although the lower percentage is always what you should look for. Then set the values for credit lines – open and total, debt/income ratio, revolving credit balance and loan rating.

Peer-to-peer lending is a relatively new way of investing. It started in the UK in 2005 and then appeared in the US in 2006. When it comes to other parts of the world, P2P loans Australia offers to its borrowers started just a few years ago in 2012. Thus, these parameters will make it easier for you to find the borrowers you feel comfortable loaning the money even though it all goes through the mediating company.

How do you make money from peer-to-peer investing?

Return on Investment is why the lenders decide to loan their money to borrowers and you need to figure out how much is fine for you. Start off by lending smaller amounts to see if you feel comfortable with the whole process and the company that facilitates P2P lending. Then, over time increase the investment and maybe even update your parameters.

Investing in peer-to-peer lending

You are the only person to decide whether this type of investment is for you. The good thing is that you choose the borrower and thus where to invest your money. The bad thing may be that you are not satisfied with the returned investment and profits you made. However, take into consideration that you don’t have to start with loaning big sums of money.

This way you will invest only the amounts you are comfortable losing if you are worried about the risks. Additionally, if you are careful about to whom you are lending the money and set parameters the borrowers must fulfill, you will lower the risks. Therefore, if you are careful you may be able to earn a decent amount from your investments.

In the end

Peer-to-peer lending is a solid way to earn money from your investments, but it doesn’t come that easy. You need to decide how much you are willing to invest, what types of borrowers you will accept and which company to entrust facilitating the process. After that, you can let the things unfold and if you are satisfied with profits, you can change some parameters and increase the investment.