5 worst peer-to-peer lending beginner mistakes

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Reza Machdi-Ghazvini,CAIA
Last updated on 17 July 2021

5 worst peer-to-peer lending beginner mistakes

You have just started investing in P2P loans and are afraid of making mistakes? Below we show you the 5 biggest mistakes when investing in P2P loans and how you can avoid them.

Mistake 1: You ignore obvious warning signs

Already when choosing a P2P platform, you can avoid some basic mistakes if you take a close look at the platform with open eyes and check its seriousness. One obvious point, for example, is whether the address given in the imprint also exists on Google. Also pay attention to the following points:

How does the platform point out the risks of P2P lending?

P2P loans are risky investments due to the asset class. However, some providers try to sell their services as risk-free. Question here exactly how serious these statements are and also check stated reviews carefully. For example, if a platform advertises very low or no risks, this should make you suspicious.

Take a good look at the team of the platform

The team of the P2P platform can also give an indication of how seriously the platform works. For example, look at how the founding team presents itself. Do the team make a "cheezy" impression? Or do they convey a serious image?

It may also be worthwhile to briefly Google the names of the most important team members. If you notice that the managing directors have no experience with financial topics, this can also indicate that something is wrong.

Pay attention to the partners of the platform

The way the platform works can also be judged by the partners it works with. Look at which loan originators offer their loans on the platform.

Another clue about how reputable the platform is can give you a frequently changing bank account. This may indicate difficulties with the banks. If the banks leave, this is always a very bad sign.

Our tip: Take a close look at the platforms and check their seriousness. If you notice any obvious weaknesses, it is better to distance yourself from the platform.

Mistake 2: You let yourself be lured by very high returns

Mistake 2: You let yourself be lured by very high returns

Yields over 20% sound tempting, don't they? Every investor would be happy about such returns, especially if they were also risk-free. However, the reality is different.

Therefore, do not let yourself be lured by very high returns because high returns can tempt you to stop looking closely. For example, the platform Envestio lured its investors with very high returns and then simply disappeared with the investors' money.

The past has shown that reputable platforms cannot offer more than 12% - 14% returns p.a. in the medium and long term. If P2P platforms offer higher returns, this is accompanied by disproportionately higher risks. This is also usually reflected in the fact that the platforms are less transparent.

Our tip: If you notice high returns on P2P platforms, remember that they go hand in hand with high risks. The platform should be able to objectively justify significantly higher yields than 14% p.a.

Mistake 3: You use the preset strategies of the platforms

Have you ever asked yourself what the goal of P2P platforms is? The answer is quite simple. The platforms' goal is to sell as many loans as possible because that is their core business.

The preset automatic strategies that you find as an investor on the platforms are aimed precisely at this. They are therefore sometimes very borderline oriented and just about do justice to the investor.

For example, if you choose a preset strategy that promises high returns, you will invest in loans with long maturities and poorer ratings (creditworthiness). Most of the time, the loans are then just about within a range that a rational investor would still accept. It is often better to avoid, for example, the longest maturities and worst ratings.

Our tip: Even if it is easy to use the preset strategies, you should create your personal investment strategies.

Mistake 4: You set the Auto Invest function entirely wrong

Another common mistake among beginners is that they often don't set the Auto Invest function correctly. Similar to preset strategies, you should not simply adopt preset Auto Invest functions and portfolios and adjust the settings yourself to suit your investment goals.

Now you are probably asking yourself: How do I set the Auto Invest function correctly for me? Especially for beginners this seems like a big hurdle, but actually it is quite simple.

First of all, ask yourself how long you can do without your money and take that into account in your settings. Long terms, for example, are a hindrance if you want to get your money quickly. Also, make sure to spread your investments over as many loans as possible and invest only small amounts per loan.

In this context, no country should make up a large percentage of your portfolio. As a simple rule of thumb, no country should account for more than 25% of your investment, which is at least 4 countries.

If there are loans brokered on the platform through loan originators, you should make sure that the loans from a single loan originator represent only 10% - 15% of your total investment. This is equivalent to 7 to 8 loan providers.

If you are looking for guidance on how to best set up the Auto Invest feature, perhaps our posts on the different Auto Invest features can help:

Create an Auto Invest Portfolio and set it up correctly:

Our tip: You should adjust the Auto Invest function yourself so that it meets your investment goals.

Mistake 5: You blindly trust the buyback guarantees

Mistake 5: You blindly trust the buyback guarantees

One of the most common mistakes is to blindly trust the buyback guarantees. Because then the following happens: You become careless and don't check the loans carefully. As a consequence, you invest in all loans without thinking about the yield, term or quality of the loans.

Freely after the thought: There is the buyback guarantee.

As you can see, this is not the right attitude for you to be successful in the medium to long term when investing in P2P loans.

In addition, there is another problem that many do not consider: The buyback guarantee is dependent on the creditworthiness of the loan originator. That means your money is probably gone if the loan originator becomes insolvent. Two good examples of how loan originators can fail are the bankruptcies of Eurocent and Aforti on the P2P platform Mintos.

Our tip: Never rely on the buyback guarantees and invest specifically in the P2P loans from which you can expect sustainable returns.

Summary

You see, in the beginning you can make some mistakes when investing in P2P loans.

Now that you know the worst beginner mistakes, you can consciously avoid them. You can find a lot of content about P2P loans on our website. If you are looking for a comprehensive guide, we recommend our P2P lending review.