What to Know Before Starting P2P Investing

Apr 15, 2024

Peer-to-peer (P2P) investing is a form of crowdfunding, where consumers and businesses can borrow money directly from individual investors through a P2P lending website. The range of interest rates is also much broader, where applicants with good credit may get a lower interest rate than they would at a bank or credit union, but applicants who struggle to get funded by a financial institution may have a much higher interest rate.

As an investment, P2P lending can be a lucrative option for your money – but with great potential profits comes great potential risk. Here are some information to know and understand before you start investing.

1) Acknowledge the risk.

P2P investment and lending is still young, which means it is highly volatile. Normally when someone is borrowing money, the bank or credit union assumes the risk for the loan. But with P2P investing, you assume the risk that the borrower may default on their loan. This risk may be mitigated by your chosen platform’s buyback guarantees, but it won’t cover all of your losses.

2) Do your research.

There are a number of P2P lending platforms for you to choose from. Compare and contrast the benefits and potential drawbacks before investing your money in one. Some questions to ask include:

- What kind of loans does the platform specialize in? (such as unsecured consumer loans or business loans)

- Are there any introductory bonuses?

- Are buyback guarantees included? What happens if a borrower defaults?

- What kind of returns can you expect to see?

- How can you withdraw funds? Are there any fees?

- How long has the platform itself been in operation? How is its overall performance?

3) Beware of scams.

As the popularity of P2P investing rises, so too does the number of scams. A P2P lending scam typically involves a P2P lending platform closing down and blocking investors from withdrawing their money. That’s why researching your chosen platform is crucial; older lending platforms with a history of returns are less likely to be scams.

4) Understand the different loan types.

P2P lending platforms often give you a choice of what kind of loan to fund. You should understand whether the loan is secured or unsecured, and whether it is a consumer, business or property loan. Many consumer loans are unsecured, but an auto loan, for example, would be secured by the borrower’s vehicle. Thus, an auto loan would be less risky than an unsecured personal loan. The different loan types all come with different risks and different expected amounts, so make sure you know what you’re getting into.

5) Diversify your portfolio.

A healthy investment portfolio includes a mix of high-risk and low-risk investment projects. A portfolio with too many low-risk investments won’t see a lot of growth, but a portfolio with too many high-risk investments has little stability and could see a lot of losses. If you decide to get into P2P investing, be sure to balance it with lower-risk investments.

6) Start slow.

Don’t put all your eggs in one basket, and definitely don’t put the cart before the horse. As with all new financial ventures, you should begin slowly to give yourself a chance to learn more about the market and to grow your confidence. Start with smaller amounts, reinvest your returns to preserve your other funds, and only accelerate your investing when you feel like you know the lay of the land.

If you need help planning your investments, our professional financial advisors are available to go through your portfolio and your options with you. Set up an appointment online today!

Links:

https://www.hondafcu.org/investment-retirement/investment-and-retirement-planning