By Invest & Fund
How to invest in peer-to-peer lending? Where do I start?
These are two questions that commonly asked by investors when entering the world of alternative finance. To help solve these problems peer-to-peer lender Invest & Fund has put together five tips on how to invest through alternative finance:
Which type of peer-to-peer lending is for me?
Investing in P2P lending offers many avenues. Do you want to lend to small businesses? Property entrepreneurs? Or would you rather lend to consumers? Do you want to look at higher risk businesses that offer higher interest rates but potentially carry greater risk of default? Or would you rather play it safe?
These decisions will all influence the type of investment opportunity you seek out and therefore the peer-to-peer site you choose. Each platform offers a range of different opportunities.
Pick your P2P platform
Armed with an idea of the type of peer-to-peer lending you’d like to do, you can look around the different platforms to see which offers the type of lending you want.
There are other considerations in your platform selection: What protections does it have in place in the event of a borrower default? How much due diligence does it do on borrowers? Does it offer a secondary market, whereby investors can ‘sell’ their loans onto someone else? What is the charging structure? Alternatively, you may simply want a platform that is easy to use and has a good reputation.
Set up your account
This can usually be done online via a debit card or online transfer. You may want to start with relatively small amounts and build up your peer to peer portfolio over time as you grow more confident.
Build your peer to peer investing portfolio
In this, it helps to think like an investor rather than a saver. This means assuming that a borrower may default even though the risks are quite low. As such, it’s worth holding a range of different opportunities (most platforms facilitate this), so that you are diversified in terms of borrowers and in terms of sectors. You may also want to vary the duration of your loans – some short-term and some long-term. Some investors will even invest across several peer to peer investing sites.
Start capitalising on your investments
The interest payments from your chosen range of borrowers should start coming through within the month, depending on the repayment schedule. Platforms will vary in the speed and efficiency of their income payments, so this is an important test for any peer-to-peer platform.
Investors can re-lend the proceeds to new borrowers to maximise their return – some platforms have an automatic reinvestment tool – or withdraw the money from the platform to supplement their income.