You know what is online peer to peer lending (in other words – p2p lending) and like the idea of peer to peer loan investing. I’ve prepared a list of 10 points to deal with if you want to start the online investment. 

Track record platforms advantages

I choose rather track record platforms which have been working at the least one or two years. As the sector of p2p lending investing is only rising now, I would prefer choosing the platforms which are in work now, instead of platforms in its projection or developing. No doubts, that past activity doesn’t guarantee your tomorrow passive income, but a platform which has worked some time, will cope with some IT bugs and operational flaws, occurring at the beginning, more easily. The example of such platform can be www.grupeer.com – our reliable partner which has been tested through the years. The most significant thing is that you will be able to read other investors’ opinions and reviews, followed by their last online financial investments. 

Loan types and terms of loans

The term of lending and the type of loans are two major questions. As a rule, once committed investments cannot be cancelled by the investors, they need to be hold till the loan maturity and only then the investors are able to sell it on the secondary market (look below). Thus, for the time of the loan money is tied in (illiquid). Nevertheless there some popular amortised loans, which mean that a part of the fund and interest is paid monthly. I can name three main variations: SME loans, consumer loans and property secured loans. Invoice financing is one of the SME loans subtypes. It may be a nice idea to diversify over various loan types and platforms.

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Diversification

When investing money in peer to peer lending, it is very important to diversify. When your capital investment on a platform is divided into small pieces of many different loans, the probability of your portfolio to be an outlier reduces – comparing with standart portfolio performance on the platform. Diversify more If you want to reduce the chance your income to become lower (or higher) than the average yield of portfolios on the platform. A graphic of Lending Club explains it here. On platforms with comparably bigger amount of consumer loans, it is faster to diversify. Otherwise platforms, launching large property loans, will take you more time to diversify. Actually, most platforms propose an autoinvest component, though it sounds more consuming.

Autoinvesting

Everyone can face a feature, which is called an autoinvest. The autoinvest is so needful for business investment loans. For the loans you want invest into you set up some criteria (for example, the duration of the loan and the minimum interest rate) after that your money will be automatically distributed into new loans if there is enough cash in your account. I think for the first time it is better to make manual investments, instead of the autoinvest ones, so that you will get a better understanding of the mortgages on offer. However, some investors never turn on the autoinvest and examine loans before investing themselves.

Secondary market

On a secondary market the loans can be bought and sold by other investors. Some sellers list their loans at a discount or a premium, while others work on par value of the principal investments only. As on the secondary market can be other investor that is willing to buy at the same time, you will not be able to vend your loans at the time you want. Thus, the liquidity changes and time to time the demand on the secondary market sways. Sometimes there is more seller or buyer inquiry. Before using the secondary market, I would recommend to spend some time on investing the primary market. It will help to deep the understanding of the platform work. It happens that the seller gets his loans on sale – it means that there some reasons to do that.

Cash drag

Money, which were invested into the

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You know what is online peer to peer lending (in other words – p2p lending) and like the idea of peer to peer loan investing. I’ve prepared a list of 10 points to deal with if you want to start the online investment. 

Track record platforms advantages

I choose rather track record platforms which have been working at the least one or two years. As the sector of p2p lending investing is only rising now, I would prefer choosing the platforms which are in work now, instead of platforms in its projection or developing. No doubts, that past activity doesn’t guarantee your tomorrow passive income, but a platform which has worked some time, will cope with some IT bugs and operational flaws, occurring at the beginning, more easily. The example of such platform can be www.grupeer.com – our reliable partner which has been tested through the years. The most significant thing is that you will be able to read other investors’ opinions and reviews, followed by their last online financial investments. 

Loan types and terms of loans

The term of lending and the type of loans are two major questions. As a rule, once committed investments cannot be cancelled by the investors, they need to be hold till the loan maturity and only then the investors are able to sell it on the secondary market (look below). Thus, for the time of the loan money is tied in (illiquid). Nevertheless there some popular amortised loans, which mean that a part of the fund and interest is paid monthly. I can name three main variations: SME loans, consumer loans and property secured loans. Invoice financing is one of the SME loans subtypes. It may be a nice idea to diversify over various loan types and platforms.

Diversification

When investing money in peer to peer lending, it is very important to diversify. When your capital investment on a platform is divided into small pieces of many different loans, the probability of your portfolio to be an outlier reduces – comparing with standart portfolio performance on the platform. Diversify more If you want to reduce the chance your income to become lower (or higher) than the average yield of portfolios on the platform. A graphic of Lending Club explains it here. On platforms with comparably bigger amount of consumer loans, it is faster to diversify. Otherwise platforms, launching large property loans, will take you more time to diversify. Actually, most platforms propose an autoinvest component, though it sounds more consuming.

Autoinvesting

Everyone can face a feature, which is called an autoinvest. The autoinvest is so needful for business investment loans. For the loans you want invest into you set up some criteria (for example, the duration of the loan and the minimum interest rate) after that your money will be automatically distributed into new loans if there is enough cash in your account. I think for the first time it is better to make manual investments, instead of the autoinvest ones, so that you will get a better understanding of the mortgages on offer. However, some investors never turn on the autoinvest and examine loans before investing themselves.

Secondary market

On a secondary market the loans can be bought and sold by other investors. Some sellers list their loans at a discount or a premium, while others work on par value of the principal investments only. As on the secondary market can be other investor that is willing to buy at the same time, you will not be able to vend your loans at the time you want. Thus, the liquidity changes and time to time the demand on the secondary market sways. Sometimes there is more seller or buyer inquiry. Before using the secondary market, I would recommend to spend some time on investing the primary market. It will help to deep the understanding of the platform work. It happens that the seller gets his loans on sale – it means that there some reasons to do that.

Cash drag

Money, which were invested into the mortgages, represent the biggest interest among the investors. There will be no interest to deposited, but not invested cash yet. The time, spent on investing into desirable loans, depends on the investor demand and the deal flow of the platform. I know, that a lot of platforms have more investor demands, comparing to available loans. That’s why some of the platforms operate queues for allocation and impose maximal bid limitations. The other important factor – is the time, taken from making a bid for a credit before the investment starts being interesting. The time depends on a particular platform – it can be either fast or slow.

Safe and unsafe loans

As a rule, consumer loans on peer to peer lending sites are usually insecure (except some car loans). As security, SME mortgages suggest either a first or second charge on the property for your safe online investment. It is better to lend with a kind of offered security. Still, even with the offered property, there is a risk that the property may not sell at the price, high enough to recover full of the loans principal. 

I don’t consider using personal warranties of the directors of some loans as a security, although some companies act this way.

A fund of discretionary provision exists on some platforms. It means that a fund has a lot of different small fees, and in a case the investors default – they get a compensation from a fund. Of course, it will work tll the compensations won’t be higher than the assumptions, invested by the company to create the fund.

There is a «buyback guarantee», offered by some Eastern European platforms (or the lenders, presenting on them) which promise to buy back the loan from the investor after «x days overdue». This pledge is as good as the profitableness of the person, which makes it. And I remember at least one worthless case of it.

The process of recovery

Unfortunately, some percentage of the loans will fail and it is okay in p2p lending. You shouldn’t worry about it till the percentage stays in a healthy relationship to the risk. As soon as the loans overdue or default, the defined process will be initiated by the platform. Make a point that the process and the average recovery rates are well known to you.

Tax

Usually, the peer to peer lending websites’ returns are being taxed by the rules of the country where the investor lives. 

If the country you are living in now doesn’t admit you to compensate default losses against interest profit earned, it can be a very good idea investing into mortgages with lower interest rates, but lower default rates as well, so that you will have a higher income after tax with a more perilous strategy.

But I have good news for you (in a pure p2p lending sense)! If you are from the UK – you are able to invest up to 20,000 GBP tax allowance in a tax-sheltered IFISA product (see comparison). But rely on your understanding of the tax implications and consult a tax advisor if you feel unsure about it.

Final tip

Don’t forget that p2p lending Europe can give you a possibility to get excited easily. Remember: no one had his real estate investment loans or micro loans investments from the very beginning. Thus – start with small things, understand if peer to peer lending investing is for you and only then increase your deposits or invest in personal loans over the experience and time.