Everything You Need To Know About P2P Investment
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Peer-to-peer investment, also known as P2P, is relatively new, but it is becoming popular among several investors because of its immense benefits. By understanding the P2P concept and how it works, one would probably consider investing in it to get higher returns.
What is P2P Investment?
Peer-to-peer (P2P) is a form of lending where borrowers obtain loans directly from a group of investors. These investors are regular individuals who will be funding the loans to get potentially higher income. The lenders will combine the money they invested in accommodating loans of qualified borrowers.
This is different from the traditional way of taking out loans where an intermediary financial institution is involved in the deal. Lenders can earn more than what they gain from investing in the bank. Similarly, borrowers may easily and conveniently get loans.
In the Philippines, “paluwagan” is popular among ordinary individuals. P2P has the same concept but with a few differences. The major difference is that in P2P, an investor does not collect an accumulated amount of cash. Instead, they earn a reasonable amount of interest out of the money borrowed from them.
How Does A P2P Investment Work?
Generally, P2P transactions are done through online platforms where lenders are matched with potential borrowers. Both lenders and borrowers can send all the application documents through emails. Hence, the process is convenient and easy between lenders and borrowers.
The lender begins by signing up and investing the money in a peer-to-peer lending platform. From there, lending offers can be made already. But as a lender, one should also indicate the term or period of the loan first before making an offer. Basically: The longer the period, the higher the return of investment.
Typically, you can lend out your money in two ways. You will either be doing it manually or let the P2P platform automatically look for borrowers who have loan terms that match yours. Allowing the platform to match your loan automatically will speed up the process. Meanwhile, doing it manually can take too much of your time.
Also, since P2P is an unsecured loan, you must carefully assess the risk before approving the loan. During the process, borrowers would be required to provide necessary information vital to their application’s approval.
The P2P platform will also request necessary documents such as proof of employment and total income from the borrower. Depending on P2P platforms, some may require additional documents essential for evaluating the borrower’s ability to pay the loan.
When the lender approves to fund the loan, the money will be immediately disbursed or wired into the borrower’s bank account.
Once the loan has been approved, you’ll start earning interest. The platform would present various options to you on how you want to manage your earnings. You can choose to automatically account for them as an available fund for re-lending service or withdraw them from the platform. If your goal is to maximize your returns, the former option is better.
Furthermore, different platforms may have different policies as to the distribution of income to investors. But usually, the regular income is given on a weekly or monthly basis.
What are the advantages of P2P Investment?
Peer-to-peer investment offers immense advantages to lenders. If you are looking for an excellent alternative investment, P2P might be right for you. P2P may come with risks, but it provides great returns as well. Every single investment poses potential risks, but here are some of its major advantages that outweigh the risks:
- Access to higher returns
Investing decisions can be very comprehensive in some cases. But for sure, keeping your money in a savings account is not the best alternative. You are likely to receive not more than a 1% return per year. So let’s say, for example, you have 10,000 pesos in your account. Therefore, you will earn 100 pesos as an interest for the whole year.
On the other hand, P2P investment offers higher rates of returns. This usually has a rate of 20% or even greater.
- Ease of use
The platforms are straightforward to use. Once you have decided to invest a certain amount of money, it is simple to sign up. You have to know the policies and guidelines on the platform, and you’re good to go. While it is always helpful to have a finance background, P2P investment does not require you to have it to get started.
Risks are always present in every investment. With the help of P2P investment, you can neutralize the negative performance of your other investments.
You are not putting all your money into one loan. Hence, the risks are being spread. You can fund multiple loans and set certain criteria for each of them. So, the default of a single loan would not mean a total loss.
What are the risks of P2P Investment?
If investing is new to you, one of the principles that you must always keep in mind is that behind every concept of higher returns, there are higher risks as well. But should you be afraid of these risks? The answer, of course, is yes. It is always important to consider the potential risks before investing. Being aware of them would help you think of a better way to deal with them.
- Loans are unsecured
You can’t go after your borrower’s assets in case of default because P2P lending is unsecured. It is very risky because you might lose all of your investment, especially if you put it into a single account. This is the reason why most investors diversify their investments to make sure they have reduced the risks.
- There is no insurance.
This risk is still related to the first risk mentioned above. Borrowers might become insolvent for some reason, and then consequently default in payment. Bank investments usually are covered by deposit insurance. However, in P2P, once the borrower can no longer pay the debt, you have no choice but to consider it as a loss.
- Investments deplete
Loans are paid gradually within the loan period. For that reason, when the full amount of the principal, including the interests, is paid, you will no longer have an investment on that particular note unless you reinvest the money.
How can investors limit the risks of P2P Lending?
- Reinvest your loan payments
This is one way to maximize the returns you will receive from this investment. You have to do regular re-investment of your earnings to avoid the decline in your returns as the borrower pays down the loan.
Your objective will always be to maximize your returns. In the same way, you can also minimize the loss that you might be suffering from the investment. As discussed above, diversification allows you to manage some risks by investing in hundreds of notes, not just one of them.
- Try to spread out investment returns.
Those loans that have good credit ratings would have lower rates. Meanwhile, a bad credit rating corresponds to higher rates. Make sure that you invest in both, not just in one area alone. There is a higher risk when you invest in only one type of loan grade, whether you get a meager return or potentially lose the entire investment.
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Investments are always susceptible to negative impacts brought by an unpredictable economy. So, why don’t you try to invest your money in more flexible and less risky investments like P2P? After all, you’ll never know how important this opportunity is unless you try it out.
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