5 beginner recommendations for investing in peer-to-peer lending
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Maybe you have just started to invest in P2P loans, or you are about to do so? For beginners, investing in P2P loans can be confusing and in fact, beginners often make the same mistakes.
In this article, we will give you 5 recommendations to make your start as easy as possible.
1. Know and understand P2P business models
The first step to investing in P2P loans is to know and understand the different P2P business models. We are convinced that you must have already noticed the wide range of P2P platforms.
The platforms differ not only in what they offer. They also work with different business models. Three good examples of the different business models are the P2P platforms Bondora, Mintos and Twino.
Bondora lends loans directly to borrowers. They are therefore a direct point of contact for both you as an investor and the borrowers.
In the case of Twino, the loan originators and the platform belong to the same group. This gives Twino much more control about how loans are offered on the platform.
2. Determine the investment period
Before you start investing, you should ask yourself 2 critical questions:
How long do you want to invest?
And how important is the liquidity of loans for you?
As a beginner, especially when investing in P2P loans, it is crucial to determine the investment period of your investments. Most P2P loans have short terms and sometimes only run for a few weeks, but there are also loans with long terms of 3 to 5 years. Be aware that your money would be tied up for 3 or 5 years if you invest in loans with such long maturities.
Especially with platforms that do not offer a secondary market, you have no possibility to exit earlier. That means you should only invest money in P2P loans that you don't need for that period of time.
But even if you use a platform with a secondary market, you should be careful. If the loan is delayed (distressed) and has a long maturity, you may face high discounts on the secondary market. It is then possible that you will only get back part of your invested capital.
If liquidity is critical to you, you should specifically look for short-term loans or so-called payday loans. Payday loans usually have a term of only a few weeks.
The P2P platforms Twino, viainvest and PeerBerry focus mainly on short-term loans. As a beginner, you can gain your first experience on these platforms without having to tie up your money for too long.
3. Diversify, but do not overdo it
Another important point as a beginner is the diversification of your investment. Make sure that you do not invest the entire investment amount in one P2P loan. Spread as much as possible, but without overdoing it.
For example, it does not make much sense to invest €1 per loan. However, the P2P platforms give you a good guideline with the minimum investment amount per loan. Just stick to this required amount.
Diversification is not only limited to the choice of various P2P loans. You should always spread your investment amount over at least 3 platforms. For example, if you plan to invest €5,000 you should invest your capital over at least 5, better 8 platforms.
For the asset class peer to peer lending, you have to consider that a platform could get bankrupt. That's called platform risk. If a P2P platform goes bankrupt, you face the total loss of your invested capital on the platform.
As it doesn't make sen to diversify to heavily over too many P2P loans, the same applies to P2P platforms. It is already a challenge to keep of track of 5-8 platforms.
4. Pay attention to the track record of the platform
Already when choosing the P2P platform you can make some mistakes as a beginner. But you can easily already sort out a large part of P2P platforms if you stick to the following principle: "Size matters".
P2P platforms that have been on the market for 3 years and have issued over €100 million in loans have a big advantage for you because the risk that such a platform fraudulent platform (scam) is quite low. Therefore, as a beginner, stick to established platforms and do not invest in P2P loans offered by new platforms.
It is also worth paying attention to the track record of P2P platforms and their parent company. For example, the P2P platform viainvest was founded in 2016 and is owned by VIA SMS Group, which in turn has been around since 2009.
By checking the track record of a P2P platform, you can additionally judge how transparent a P2P platform is.
Characteristics of reputable P2P platforms include:
Regulation by a financial market regulator
Presentation of the management and their CVs
Publication of annual reports
Audit of the annual reports by an independent auditor
5. invest in platforms that are monitored
One point that beginners in particular do not consider is to pay attention to the regulation of P2P platforms.
However, the monitoring of P2P platform by a financial supervision is a critical point. If you compare the European regulations regarding P2P platforms with the regulations in the USA and UK, it quickly becomes apparent that there are major differences here. Since there were no uniform regulations for P2P loans in Europe, the regulation was left to the countries.
For example, Mintos (Latvia) is unregulated, despite more than €5 billion in loans issued. This would not be possible in the US or UK. However, Mintos is aiming for timely regulation.
You as a beginner should therefore rather invest on regulated platforms or on platforms that aim for regulation. In our peer to peer lending guide, we reviewed and ranked the best P2P platforms. The best P2P platforms are either already regulated or have applied for an official license with their financial market regulator.
The European Crowdfunding Service Provider (ECSP) regulation adopted by the European Union will also help to ensure that private investors are more strongly protected