Is it really possible that one can earn double-digit returns by lending the money online?
A p2p loan, in this context, is considered to be an innovative way to invest your money and earn monthly cash flow. One can also get an easy online loan. But such lending and borrowing comes with a risk of default.
So below are the five things which you should essentially know before planning to lend on p2p platform
1.Start lending small
You should not let greed cloud your judgment. If you are in a hurry to pocket the double digit returns, then you might overlook many of the warning signs. It is for this reason that you should start out by lending a small amount and learn the tactics before investing a large amount.
The ROI depends on the borrower’s profile and loan tenure. The total amount which can be invested by a lender, all across P2P-NBFC platforms is capped at Rs. 10 lakh, as per the existing norms of the RBI.
Most of the P2P companies believe that the lender should not be in a hurry to take the money out but he/she should wait for three to six months to reap the returns.
The lender should invest his/her money on multiple borrowers. It is better to compare various platforms and then learn about P2P lending before investing a bigger amount of money.
2.The key is diversification
The lender should spread his/her money among multiple borrowers. The biggest remedy is diversification so that the risk is mitigated while lending on P2P platforms. The lender should also look at the average return which is offered by the p2p platforms so that there is a diversified portfolio. The lender should at least have 100 borrowers in one portfolio.
3.The lender should check the borrower’s profile
Many P2P companies divide the borrowers into categories like very low risk, low risk, moderate risk, high risk and very high risk. The ROI on the investment basically depends on the borrower’s profile, amount of loan and tenure. The interest rate is offered on the level of risk which is from 12.5 per cent to 35 per cent. One should also invest according to the risk appetite. P2P is an alternative asset class that has its own value and potential.
4.The defaulter rate should be checked
The defaulter rate reflects the ratio of defaulters on the given platform. This is vital in choosing the platform. The defaults can be due to intentional or capability issues of the borrower. It is advised that the lender should check if the company has displayed the defaulter rate explicitly on the website.
5.Keeping the older company
Because P2P lending is the fastest growing sector, the companies who have RBI licenses can have an extra edge over the new players.