CrowdLending or Peer-to-Peer (P2P) lending platforms are not only becoming popular among the borrowers, but also lenders.
Many investors want to have a piece of crowdlending income in their portfolio. That is why; they are increasingly looking to land on such platforms. If you are the same opinion, it is essential to understand the precautions which you need to take while investing in crowdlending platforms.
We will now share with you a few tips which you need to know while investing in crowdlending.
Invest only a fixed percentage of your portfolio
Many people go on investing in the crowdlending platform, thinking that the returns are linear. You need to understand that on such a platform, there will be specific borrowers who will not repay your money. Hence; instead of being lured by the high interest rates, you always have to make a wise investment.
The best way is to invest only a fixed percentage of your portfolio in crowdlending platforms. You need to understand that rather than just calculating the returns on investing a significant amount of money, you have to factor in the downside as well. Ideally, you should not invest more than 5% to 10% of your overall portfolio. It will ensure that in case of any downside, your entire portfolio remains protected. You will not end up losing a significant amount of money. Due to high returns from the crowdlending platforms, you can increase the overall profits of your portfolio, which will help you outperform other investment options.
Do not go for arbitrage
The interest rates, which you usually get on the crowdlending platforms are on the higher side. That is why people think that they will borrow money at lower interest rates and take advantage of the arbitrage opportunity. You need to understand that crowdlending platform have a certain amount of risk. You only have to invest the money which you can afford to risk. If you borrow money for an arbitrage opportunity, chances are you might end up making a loss. There will be at least a few loans which will go sour. It is essential to invest your own money rather than borrowing to invest money on the crowdlending platforms.
Choose the right platform
Most platforms vet the borrowers and also take care of the paperwork. The platforms act as an intermediary between the lender and the borrower. They also take care of the legal processes. It means that the role of the platform is pretty crucial when it comes to crowdlending. Remember to always read reviews of the platform, such as this review of Mintos, before investing. When you go through the reviews, you will know a lot of unique features about different platforms and it becomes easy to pick the right one.
Diversify your lending portfolio
Crowdlending platforms are in their nascent stage. They allow you to provide unsecured loans to borrowers who are unfamiliar to you. In spite of the high-interest rates, there is always a need to be cautious. The best way is to diversify your portfolio among borrowers. No borrower should be more than 20% of your crowdlending portfolio. When that is the case, you can be sure that in case something goes wrong, you can recover your money. Irrespective of the record of the borrower, you should not lend more than 20% to him/her. It will help you reduce the risk of any default.
Choose borrower carefully
Most of the crowdlending platforms provide you with extensive information regarding the borrower. You can go through the income statements of the borrower and the nature of their work. Many of the crowdlending platforms also give you a glimpse into their credit history as well. That is why it is effortless to research different borrowers. The problem is that most of the investors think about the interest which they get on the loan. They do not research much about the borrower. It can be a big mistake.
It is always advisable to go with the low-risk borrower even when the interest rate which you get is on the lower side. Doing so will ensure that you get back your money, and you can make a decent return as well. The more you research your borrowers, the easier it will be for you to avoid any default. If you want to make a significant amount of return from the crowd lending platforms, researching the borrowers is a must.
Do not forget to reinvest
If you want to capture the upside of the crowdlending platforms, it is important to reinvest your money. When you reinvest at least for the first couple of years, you can take advantage of the compounding effect. It will ensure that with time, your corpus grows at a pretty decent pace. You can beat the returns of conventional and safe financial instruments once you do so. When you reinvest your profits, there is no need to add a significant amount of corpus. The reinvested amounts will help you grow your portfolio. It is essential to understand that instead of just looking at the yearly interest rate, you have to look at the compounded earnings which you can get after a couple of years. It will help you make a significant amount of money with the help of crowdlending platforms.
Track the industry
Crowdlending platforms are in their infancy. Most countries have little to no regulations when it comes to crowdlending platforms. The legal and regulatory landscape is fast evolving. It means that you should always keep a watch on the rules and regulations. It will help you understand whether you can continue with your investment or whether you need to en-cash.
In most cases, governments and authorities all over the world are supporting this industry rather than hampering its growth. In spite of that, it is advisable to be aware of the changing regulatory landscape. It is another reason why you should not invest more than 5% to 10% of your overall portfolio in crowdlending platforms.
So, if you are interested in investing in crowdlending platforms, these are the seven tips which you should always follow. Using these seven tips, you can not only make good returns from crowdlending platforms, but also keep your money safe and reap the rich dividends of compounding. Rather than investing a significant amount of money in crowdlending platforms, it is better to follow this guide while investing.