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.