We may have outlived the utility of conventional borrowing and lending through walk-in bank branches, or through agents who promise funds in an instant, using their resources and contacts.
And still, in this shaky economic time, we still ask how to lend money for profit? Is it still possible in 2020?
We are living in a world that is being dominated by the world wide web. We may have heard about peer to peer lending, and this form of lending has undoubtedly caught up with scores of borrowers and lenders.
We look for convenience, comfort, and speed, and there are reasons to believe that lending money online helps all the stakeholders get what they aspire for.
Peer-to-peer lending helps individuals to get loans directly from other borrowers and individuals. It is undoubtedly a significant breakthrough for those who would like to cut the middlemen, including big financial institutions.
Over the years, peer to peer or P2P lending has become a much sought after alternate form of lending.
This form of lending is also known as social lending or even crowdlending. P2P has become popular because of many reasons, and its growth trajectory has been quite impressive since 2015.
Therefore, it would be interesting to know more about the right answer to the question of how to lend money legally as individuals.
We are hopeful; the article will provide the readers and lenders better insight into the new world of P2P lending and how one can make the best out of it as a lender.
1) Best Way to Lend Money for Profit as a Beginner
To begin with, as a lender, you must be aware of the fact that you need to be associated with a portal that brings together both borrowers and lenders on the same platforms as P2P customers.
Additionally, based on experience and feedback from experts, here are some common-sense tips that may help beginners in particular.
Never put all eggs in one basket
This is a lesson that many peer-to-peer borrowers and even conventional borrowers often learn the hard way.
It would always be prudent to ensure that your funds are invested in smaller amounts. In other words, try to make the average size of microloans as little as you possibly can.
This will help you to spread the risk rather than depending on a few borrowers who may end up defaulting or even delaying their payments because of many reasons.
Look at different kind of diversifications
Diversification is much more than lending your money to as many borrowers as you possibly can.
You should make sure that each diversified borrowing goes through the right kind of due diligence process.
Make sure that even the smallest of borrowers are put through the credit score models, and their professions, jobs, and other attributes are entirely checked.
Try and stay fully invested
As a beginner, it is quite possible that you may like to play safe. While this cautious approach is welcome, if you are into the lending business, make sure that all your money that has been earmarked for lending does not sit idle.
Funds that sit idle do not give anything to you. You may have sourced money by incurring an interest cost on it, and therefore you must make sure that your money does it sit idle.
It will be an interest burden that you can ill afford. Please do not leave any stone unturned to ensure that you get decent interest income out of it.
Understand the importance of research
Online lending, while having its own advantages, also comes with its own share of problems. In many cases, borrowers and lenders may not meet physically.
Therefore having a robust, proven, and time-tested researching of critical importance. Every borrower has to be checked on his or her personal, professional as well as credit history.
They must be rated based on their risk profiles. In short, the various profiles of the borrowers must be understood fully before you lend your money.
Identifying the right borrower with the right financial strength and integrity makes your job simpler.
Your repayments will become convenient and easy when the customer profiles are healthy, reliable, and secured.
Keep risk appetite in mind while lending
Each borrower has a specific risk appetite and hunger, and there is nothing wrong with it. As a first-time lender in the P2P market, there is nothing wrong with being cautious and conventional in your lending approach.
Ensure that as a lender, you are entirely in the know as far as the borrowers’ risk profile is concerned. This will help the lenders to have a better understanding of the borrowers and can help them to make sure whether they fall within the risk appetite that they have in mind.
It may not be prudent to fall for possible higher interest income and lend to borrowers who do not have the best profiles. You would do better to play safe and lend money only to those who have impressive overall credit and other ratings.
2) Choose a Reliable Platform
As a lender, make sure that you are associated with the best P2P lending platforms. The lending platforms should have a good reputation regarding processing methodology, and other such things are concerned.
All the applicable fees should be transparent, and there should not be any hidden surprises by way of fine-prints and other such indiscreet methods and approaches.
Understand that lending money online happens within minutes, and there is hardly any physical interaction between the borrowers and lenders.
Therefore, as a borrower, please ensure that the platform is checked, double-checked, and, if needed, take professional help if you are not too sure about any aspects of the lending platform. In short, never leave anything to chance or faulty interpretation.
Reinvest and choose rates wisely
As a moneylender, you must understand one simple mantra. You cannot afford to sit on the laurels of your success.
Yes, you may have made a decent profit out of your lending, but it would be wrong to let the profits just sit idle in your account. The secret to growth lies in reinvesting your capital and also a significant amount of your earnings.
Understand the importance of reinvesting for as low a time period that is comfortable to you and also the borrower. Do not allow your loans to remain with your borrower for too long a period of time.
Interest earning is the main reason for your being in the business of P2P lending. Therefore, make sure your loan products are correctly priced.
They should not be too steep or too small. You must have a decent amount left in your kitty once the loan repayment process is complete.
It should be a win-win situation for you and the borrower. Only then can you expect to repeat business and new businesses from referrals and other silent marketing forms.
3) Educate Yourself as a Lender in a P2P Environment
While you must know the right answers to the question as to how to lend money for profit, you must realize that there could be many slips between the lip and the cup.
Here are some risks that you must be educated about as a new P2P lender.
The platform is, according to experts, one of the essential points to bear in mind when you choose to be in the P2P lending business.
According to research and also from various sources, many well-known P2P lending platforms shut shop suddenly.
2020 alone may have seen the shutting down of reliable and dependable P2P lending platforms.
Analyze the strengths and weaknesses of the platforms before you get into it and commit your funds.
Loan originator risk
There are many middlemen who many lenders often make the mistake of considering them as borrowers. You should be wary of these loan originators.
They may offer a better interest rate and may be ready to pick up the entire loan portfolio for an attractive price.
Stay away from lucrative offers and instead focus on the individual retail loans because it will help you to diversify your loan portfolio.
This is a risk you have to contend with when you are in the lending market in a P2P environment.
Ensure the risk of the borrower is adequately assessed using the best tools you have at your disposal.
Be aware of your risk appetite, and do not go beyond it. Spread your risk as far and wide as you possibly can.
As a borrower, it is quite evident that you are in the marketplace. The only thing that is constant in the market place is change.
Therefore, be sure that you are ready for such unexpected changes. A decision by the Fed Reserve may lead to a sudden tightening of the credit market, or it could overnight become liberal, and the interest rates could come crashing down.
You must, as a P2P lender, know how to manage these market uncertainties efficiently and professionally.
4) Choose the Right P2P Lending Platform
If you are just starting out with P2P lending, we suggest registering on platforms such as PeerBerry. The platform is an established and legitimate P2P lending marketplace with proven track records and very good performance, even during a crisis like the one we’re in now.
If you are looking for more alternative platforms, head over to our lists on the Best Peer to Peer Lending Platforms to Survive the COVID-19 and Best Business Crowdfunding Platforms to Survive COVID-19.
This point has been spoken about a few times above. As a lender, make sure that you are associated with the right P2P lending platform.
Check on their credentials, look into their previous track record. Go through the due diligence process before you get committed to a lending platform.
Ensure that you complete the legal and other requirements
There are some well-laid down rules and regulations that you must adhere to before entering P2P lending.
Make sure that, as a borrower, you are a registered entity. Only when the registration is complete, you must transfer funds.
Some robust KYC and Anti-Money Laundering Regulations must be gone through at all points in time.
Treat loan as an investment
Investments can happen in many ways, and lending your money is a good investment. You can look to invest in small and medium-sized real estate developers.
In case you have registered yourself as a lender for personal loans, you can also look into the possibility of investing in auto-invest tools.
Each P2P platform has auto-invest tools, and you can invest in the same after going through the due diligence process.
Track performances so that you know, you are earning money
Yes, there is money to be made as a P2P lender provided you know how to track your performances regularly and take corrective action wherever and whenever necessary.
To sum up, there is no doubt that P2P lending and borrowing using online and digital platforms are the way forward. If you have decided to be in this business, you have made the right decision.
Move ahead, plan well, and build your success story as a lender, one brick at a time. Don’t bite more than what you can chew, and at the same time, do not be a chicken.