The Opportunity & Risks You Must Learn Before Investing On A P2P Platform
P2P Funding and its opportunities and risks
From time immemorial, people have always needed more money. May it be for emergencies or the fulfillment of dreams, the concept of loans and the lending process in itself have saved many lives and helped kept the economy going.
Traditionally, people tend to ask help from banks. But in the modern world, an alternative opportunity that is climbing up the ranks is P2P funding or P2P lending. To define it in a simple term, P2P funding platforms work as a connection from people who want to invest their money to people who want to borrow some money.
By that concept alone, P2P funding is a very promising opportunity. And there are many more reasons why – the process is a lot faster, the requirements are much reachable, and the interests are considerably better.
In this article, we will look at the opportunities in the P2P funding scene, as well as the risks that prospecting investors or borrowers must be aware of.
Opportunities in the P2P Lending Scene
Here are the promising things about peer-to-peer lending platforms and reasons why prospecting investors should jump in on the opportunity to capitalize on this amazing opportunity.
- In a report by CB Insights, the P2P lending industry is the most recommended by investors as the best fintech companies to invest in.
- Governments and banking institutions are now being made aware of fintech companies. Consequently, they are warming up towards partnering with them to survive in the financial ecosystem. Particularly, many governments are leaning towards using peer-to-peer lending platforms to offer their services to individuals without access to banks.
- There is so much need for alternative finance and thousands of businesses need easy access to credit. Especially at the time of a pandemic, credit financing for SMEs will help them stay afloat in the midst of all the challenges that they face. For Asia and the Pacific, in particular, Crowd Fund Insider that the financial gap that needs credit amounts to $2.38 million.
- P2P lending companies allow people a sense of flexibility which makes them a great investment opportunity to explore. Despite the fact that everything has a risk in this world, P2P lending platforms gives investors the ultimate control on how they spread and minimize risk on their money. Investors also have the power to choose the type of industry or need they would invest their money in – and as this is something that is not available for other investments.
- P2P funding drive a strong and undeniable social impact. At its core, peer to peer funding platforms give people power. When they give people power to get the money that they need, they provide people employment, opportunities, and competition which makes the economy very dynamic and strong.
Risks in the P2P Funding Industry
Investment is not for the faint of heart. It is fairly unpredictable and there is always a chance of things not going according to the plan. The trick is always in thinking clearly about your choices and your approach. So, to help you be prepared, here are some risks you have to be ready for in a P2P lending opportunity.
- Investing in P2P loans is equivalent to facing the risk of a borrower default. As P2P funding works in a similar way to lending some money to your friend, there is always a chance that they might not be able to pay you back what they owe on time, and in some cases, at all. If this happens, you might receive very little interest, your money back, or losing all of it. A way to work around this is to look into P2P platforms with return guarantees or spread your fund across different loans so your investments will not get wiped out at once.
- P2P lending can also be affected by the political and socioeconomic climate. Just like other forms of financial investments, P2P funding can also get affected by the stock market crash, economic performance, political issues and concerns, wars, and health outbreaks like the pandemic. As much as we want to eliminate this risk, most of the time, it is simply out of control. One important tip to align your actions with is to never invest more than the amount that you can afford to lose.
Ways To Be Smarter In P2P Funding
- Before diving into any P2P platform, take time to understand how it works and how you can make the most of it. Look at how lending works in the company, what they will ask from you, and the terms of conditions that come with the investment. If there are questions clouding your mind, initiate a conversation with people behind the platform so you can learn all the things you need to know.
- Diversify and spread out your money as much as you can. Looking at the abovementioned P2P lending risks, you should not place all of your eggs in one basket. Divvy up your available investment fund into several borrowers to improve the chances of getting returns.
- If you can, weigh in on the borrower’s profile. In many P2P platforms, you can get access to a buyer’s behavior, history, and risk profile in the platform. Your investment has a good chance of getting returns from a Repeat Borrower with a good repayment history and proves lower risk compared to a new one.
- Reinvest, reinvest, and reinvest. If you are planning to invest on P2P funding, a good strategy is to keep reinvesting even after you get the returns on your initial investment. This compound earnings will give you better returns in the long run.
All investments, whatever the type might be, come with their own set of opportunities, challenges, and risks. If you’re looking for an up and coming way to make money even while at home, there’s no denying that P2P funding is a very tempting way to do so. This is a very promising fintech opportunity that can provide you with amazing returns. And at the end of the day, reading up on the matter and being careful with your actions will make you smarter in the decisions you will make.