Peer-to-peer lending is on the up. Doubling in size since 2013, the industry is getting stronger and, as a result, many more investors are looking to alternative finance as a way of getting a better return on their money. But investing in a new industry can be unnerving, so here are a few points to think about before you become a lender:
Get to know the industry
As a lender, you are essentially taking the place of the bank. You’re the one with the money to spare, and it’s your decision who you lend it to. The way to find a suitable borrower is through an online peer-to-peer lending platform. They personally look into each individual’s, or small businesses’, assets and rate them according to the level of risk they hold. The higher the risk, the higher the interest rate you’ll receive on your investment.
It’s then up to you how risky you want to be. You can decide to lend to people with lower credit ratings in return for a higher interest rate, or, accept a lower rate in return for the security of lending to companies with better credit ratings.
When it comes to making your first investment, dip your toe in first, before going for the cannonball. Start by investing a small amount of money until you get the hang of how the industry works. Then, once you’re used to the system, you can choose to invest more. Most lending platforms have a low minimum investment rate and for those of you looking to make a certain type of return but don’t have the time to manually pick and diversify your loan portfolio then you can use LendingCrowd’s autobid feature.
Know the risk
As with all investments there’s a financial risk when you lend your money out for a return. But knowing the risk is the first step to reducing it. Peer-to-peer lending has relatively more risk than with a traditional savings account, but less than investing in stocks and shares. So, when choosing a business to invest in, make sure you review it thoroughly by checking out their business profile, their financial needs and management information.
Only companies with good credit ratings are accepted as candidates for loans. However, as the future is unpredictable, there’s always the possibility that a business will not be able to fully repay its debt. Many lending platforms have recovery systems in place in case this happens, however there is something you can do to minimise the risk to your investment…
Diversifying your portfolio is the best way to manage risk. By spreading your money over many businesses with a range of credit bands, the impact on your overall return is reduced if one business can’t repay its loan. Simply put, don’t put yourself in the position where your overall return is dependent on the good performance of one or two businesses. Invest smaller amounts in multiple companies and you’ll increase your chances of securing a great return.
There are so many investment opportunities to choose from. More and more small businesses are turning to peer-to-peer lending sites because they can get cheaper and easier loans than from a bank. While banks have buildings and administration costs to think about, peer-to-peer lending is done entirely online so the running costs are low. This saving is then passed onto the borrower in the form of a lower APR (annual percentage rate). It’s no wonder that the number of small businesses signing up to peer-to-peer lending platforms is higher than ever before, which is giving investors a greater range of companies to choose from.
So, if you like what you’ve read so far, then perhaps it’s time to become a lender? Once you make your investments, and the loans are complete, you’ll receive monthly re-payments from the businesses you invested in. Just remember, the money you gain on your investment is not tax-free, so you will have to include it in your tax return.
Peer-to-peer lending doesn’t just give you the chance to see a return on your investment. It allows you to invest your money in real people, not faceless corporations. From your investment, small businesses get the money they need to hire new staff, rent out a second shop or perhaps purchase a van to increase deliveries… and as they grow, so does the British economy. So what are you waiting for? Become a lender and start putting your money to better use today.