Peer-to-peer (p2p) lending is an excellent way to make money. In p2p lending, you lend money to others in exchange for interest. But, if you wish to start investing in peer to peer lending, a lot of questions can come to your mind such as, how to start investing? What to expect from it? In this article, we are going to guide you through the right way to invest in p2p lending.
First, before you make any financial decision it is most important to set goals. Generally, you should make two goals for your investment. First, how much you will commit to it each month and what is your income goal for the investment monthly.
It is important to define how much you can commit to the p2p investment each month. After the first investment you will have to put in fresh money into the investment monthly to make it substantial. Usually, you should assign a fraction of your monthly income to p2p lending.
Afterwards, you have to define how much you like would to invest in order to generate returns each month. Of course, this is something you must be able to achieve and then you will need to redefine just in case it is achieved, for instance yearly. A general rule of thumb is to know which p2p platform can give you on average a 10% annually. For instance, if you are making £100 every month then you must have almost £12.000 invested in p2p lending.
Lastly, you have to define the distribution of peer to peer lending in your investment portfolio.
Select a P2P Lending company
The next important thing that you need to do is select a p2p lending company. Select a company that you have heard before not just on the internet but in the financial press also. Furthermore, you have to select a company which has a significant volume of available loans. Eventually, you will want to invest in as many loans as possible in order to protect your investment. Therefore, it is critical that you have as many loans to select from. A p2p company which only has a few dozen of loans available is quite suspicious.
Invest in Your First p2p Loan
After you have chosen the p2p platform then you have to just invest your first loan. Of course, you will have to transfer some money on the platform. Majority of platforms offer quick bank transfers. So, the money can be available for p2p investment within two days. Then, when your money is available for the investment you can invest in any loan. This article is not only about strategies to invest in p2p lending, but it also aims to get you familiar with different filters which p2p platforms offer. It is advised to get familiar with the filter to know which kind of loans are available.
Then, you just have to make your first investment to get started in p2p lending. Keep in mind that as a fresh investor you have to invest the minimal possible amount in any loan to diversify your investment and decrease your exposure to risk.
After you get familiar with the process and start investing then you need to get into the automated process. Of course, at some point, you are going to have returns in your account daily and you would not have to continually reinvest your gains and chose new loans. Hence, you have to use the auto-invest function which majority of the lending platforms offer. Usually, they are called ‘Auto-invest’ or ‘Portfolio manager’, it depends on the platform. A few of those functions can be quite opaque; however, most of them allow you to set filters of your choice so that the platform can just invest in any loan which matches your chosen criteria.
Therefore, it is very important that you understand what filtering is. Else, you will not know how to properly configure the auto-invest function of the lending platform which you are using. Similarly, keep in mind that when you start auto investing, set your automated investment to the minimum amount possible on each loan. Once the auto invest function is all set, then you can start to enjoy a fully passive stream of income from p2p lending.
Monitor Your Growth
The last step wouldn’t get you a direct return on your investment, however, it is important. You have to monitor the growth of your investments. This is significant since it will tell you if your strategy is actually working or not. If you get a lower return on your investment because the majority of the loans you had invested in default, then you have a problem. Then only carefully tracking can show you why this is happening. You must monitor your peer to peer lending accounts once in a month. Majority of platforms will inform you about your yearly returns of the investment. But you need to be careful as these numbers are generally estimation and you will have to use a more accurate method if you want to know your actual returns on investment. However, if you are just getting started then given numbers are good enough.
If you notice that your returns are low compared to what the platform advertised, then it is time to go back to the earlier step and readjust your strategy. Monitoring your investment progress can also tell you if you have achieved some of your goals or not. And whether it is the time to set new targets or go to the next level.
What is Next?
After you have done your first peer to peer lending investment then it is time to repeat the procedure repeatedly to increase your investments. You need to diversify among different loans once you add more money to a lending platform. However, also you should diversify in numerous platforms and even currencies. Eventually, you will get a dense passive income producing in your portfolio which will increase over time.
Further you need to get familiarise with the Innovative Finance ISA as it allows investors using peer to peer lending to get tax-free interest.