Part 1
P2P lending is an alternative means of investment. Or in other words, it’s another way to make your money work for you. However, what one needs to remember is that it’s another way to make better returns through a risk-based investment. Thus, those who jump into the fray without understanding and managing the risk can end up burning their fingers. But no risk is equal to no gain. So how can an investor in P2P lending make money by minimizing risk?
Let’s begin by understanding the process. P2P lending brings the investor or lender directly in contact with the borrowers. The lenders select the borrowers they want to lend to basis the information provided and the borrowers repay the loan back to the lenders with an interest. This interest is the earning made by the lender on the principal they have lent.
Understanding your Borrower: The first way to minimize risk is to understand the borrower. He is the person you are handing over your money to. He is the one who is going to not just pay back your money (principal) but also the return on that money (interest). A credible P2P platform like Faircent, would have evaluated each and every borrower on the basis of more than 55 parameters to understand their ability, stability and intent to pay. Only after a thorough verification process, will they list the borrower and his requirement. However, each borrower is unique in terms of his/her requirement, profile, risk bucket. Your investment decision should be as per your risk appetite. The information has been provided for you to take an informed choice. Spend some quality time trying to understand this information provided, before selecting the borrowers you want to lend to. Do take support from your portfolio manager, if required.
Understanding Reverse Auction: Faircent works on the reverse auction model. This means that both the borrower and lender have been provided a fair and equal platform to trade. A lender sends an offer to the borrower which the borrower may accept or reject or make a counter offer. A borrower can also approach you with his requirement. A credit worthy borrower is much in demand and hence will be wooed by many lenders. A quick turn-around time is important since such a borrower will get funded very quickly. Borrowers are on the platform because they are looking for the lowest rate of interest while you are there to get the highest rate of return. An offer should marry both these requirements. Making the right offer to the right borrower at the right time is the key to make more and better returns.
Spread your risk: There is no way we can say this enough. It is very important to diversify your investment into as many loans as possible. And by that we don’t mean putting Rs. 2,50,000/- across 10 loans of Rs. 25,000/- each but to aim for 50 loans of Rs. 5,000/- each. Because this way if you are unlucky and a borrower does default on the loan the most you can lose is 2% of your total investment which can be covered up by other investments on the platform. Now you may think that managing 50 loan tickets will be a huge task. But at Faircent, we have a very efficient tracker who does the job for you. All information will be available to you on your dashboard at all times. Add to this, efficient, tech-driven processes like e-Sign and e-Repay and managing a huge portfolio is not such a task any more.
Keep watching this space for more tips. In the meantime, go ahead and start investing! Because every % counts!