From Patrick Watson at Forbes:
“The new way to be your own bank is as simple as it is ingenious. It’s called peer-to-peer (P2P) lending. Using any of several online platforms, both lenders and borrowers can transact loans directly…With the bank out of the equation, the borrower’s rate drops and the lender’s return goes up. The difference can be significant for both lender and borrower. And P2P can be a great portfolio diversifier if you already have stock or bond investments. Of course, rates go up and down over time, but P2P lending can earn investors a higher yield than most other fixed-income instruments—without higher risks.”
With peer to peer lending bursting into the financial services scene, P2P lenders are growing exponentially, but there is still a long way to go before they gain a significant market share currently dominated by traditional banking. The relative ease of making finance available, coupled with today’s environment of low interest rates and rising inflation makes P2P lending a viable alternative for both lenders and borrowers.
With that said, it is critical for one to understand the potential risks of P2P lending as well: the risk of default as well as liquidity risks. Investing in P2P platforms means that your cash is tied up for the loan term and selling your loans to another investor or withdrawing might not be possible. In order to mitigate default risks, it is crucial for investors to select P2P platforms that suit their risk appetite, understand details of the borrowers as well as to diversify investments. Proper due diligence can also be done to ensure that the platform is financially stable and growing in the healthy direction.
From Robust Tech House on Orca Money:
“Peer to peer lending (“P2P lending”) has emerged in recent years as an innovative form of financing. P2P lending gives retail investors the chance to earn greater returns on their investment compared to deposits in financial institutions and provides borrowers with lower interest rates. The P2P industry is filling the gap un-served by mainstream financial institutions. However, P2P investment also comes with significant risks. Investors, therefore, need to understand what P2P lending is and take precautionary measures.”
- Diversify your investment
Contrary to Warren Buffet’s views on diversification, a guiding principle for safe investing is to diversify: Do not put all your eggs in the same basket. Unlike individual stocks which Warren Buffet was referring to, many P2P platforms are so popular that all available allocations for investors are snapped up within the day. This suggests that investors are not able to do proper due diligence before lending and therefore, it is important to diversify your investments.
- Start Small on Each Platform
P2P platforms differ in many ways, from interest rates, to information provision all the way to investors APR. Since most platforms in Singapore allow minimum investments of S$1000, starting with a small amount and getting comfortable with individual platforms allow investors to decide which platforms best suit their investment needs.
- Start with lower risk options
A general rule of thumb: The higher the interest rates, the higher the risk. New investors should start with low interest rate facilities, until they become more acclimatised to the investment types and their comfortable risk to reward ratio. Using personal judgement and decision making to place investment decisions in a limited time frame requires practice and experience.
- Develop your personal red flags
Personal red flags will be key in decision making, these can include metrics such as industry of the borrower, cash flow records of the borrower, working capital strength, ability to make profits etc. These measures can allow the investor to make a quick and relatively safe investment decision.
- Understand the motivations of the P2P platform
Investors should choose P2P platforms that align with their interests. P2P platforms differ in their structure and revenue recognition model, some receive revenue when investments are made, while others accrue their revenue when loans are repaid. P2P platforms which want to maintain a positive track record will take meticulous and shrewd steps to pursue bad loans and restructure loan payment profiles.