How can One Reduce Risk with P2P Lending?

Lending money is considered to be a risky affair but there are many ways in which one can minimize the risk. P2p lending in India is considered to be a relatively new concept; the RBI regulations for it are barely a year old. The P2P lending sector in India has promising players which will further propel the growth in an industry which depends on robust processes and back-end systems. Greater convenience for the borrowers is not the only reason that P2P lending online is gaining a lot of traction in the Indian market.

There are many investors who are turning towards P2P platforms as a new form of an alternative asset class. The P2P market offers the advantage of higher and fixed returns which are not, in any way, vulnerable to market turbulence.

This is the reason why this new form of lending is winning over the traditional market-linked investment instruments.

Below are the effective ways in which one can reduce the risks:

Understand the platform thoroughly

You need to understand in a vehement manner as to how the online p2p model works before you can lend any money on it. As an investor, you should be aware as to how the money is being lent on the platform and what are the various risks involved.

You shouldn’t hesitate to ask a p2p company about the overall volume, recovery process, defaults and likely returns. You can do your own research or just simply contact the P2P Company through phone calls, chats or emails.

Don’t go overboard

P2P platforms, no doubt, can offer higher double-digit returns but it does not imply that you should invest your entire savings inthe P2P platform.

First choose the amount which you wish to invest and then diversify it into various asset classes.

You should split the money among the platforms

If you decide to lend the money on the P2P platform then it is much better to start out with smaller amounts. You should also divide the corpus into various alternative investment options and P2P platforms.

It is essential that there should be diversification among the platforms and also within a platform, where one can choose from the diverse borrower profiles. There is a less chance of principal default when there is more diversification.

It is wise on one’s part to select as many borrowers as possible which across a varied spectrum of interest rates. This will make sure that the returns and risks are optimized.

A wise selection of borrowers

The investor should understand the profile of the borrower and conduct due diligence, before lending.The P2P platform should also provide clarification regarding the borrower’s family background,educational background, and dependents before going ahead with the loan.

There can be a considerable alteration of net returns because of factors like city, employment status, etc. It will also help when one is choosing an experienced platform. If the particular p2p platform is into the business for a long amount of time then it will have required support systems in place with regards to legal support, collection support or customer service support.