When I started out investing in peer to peer lending I had no clue what to look for when picking a platform. Starting out everything looks the same and knowing what to look for is not easy.
Here is a short list of things to look for when starting out.
BuyBack or PayBack guarantees
A BuyBack guarantee is a promise from the lending platform or loan originator that they will repurchase a loan that is not being repaid.
Many platforms offer (but not all) offer BuyBack guarantees on some loans, some offer them on all loans while other do not offer any type of guarantee. When starting out this is nice type of insurance that makes it unlikely to loose your investment in case the loan defaults.
Keep in mind that having a BuyBack guarantee does not mean that it is impossible to loose the investment. Most BuyBack guarantees do not cover the case when the platform or loan originator go bankrupt.
In addition, in some cases the BuyBack guarantee will only guarantee the buyback of the principal and not the interest. The BuyBack also kicks in only after a notice period and some processing time which can all together take between 1-3 months depending on which platform or loan originator you are looking into. If the interest is not repaid as part of the BuyBack it means that you capital is ringfenced which will result in a lower overall return rate.
Auto invest feature
This is the MOST IMPORTANT feature a P2P lending platform can have. After starting out this is what most of investors will be using in order to automate their portfolio.
A good auto invest feature will have 2-3 of these covered:
- possibility to make more than 1 auto invest strategy
- prioritization of investment strategies
- prioritization on certain parameters (highest interest rate, shortest duration…) within 1 investment strategy
- auto investment in secondary market
The Secondary market is a place where investors can sell their loans to other investors.
A large and active secondary market is an investors safety net. It gives the opportunity for investors to get their funds out before the actual loan terms end.
For active and diligent investors the secondary market offer the opportunity to make more profit and better returns. There can be many deals on the secondary market of loans can be sold for a higher profit than originally bought for.
The types of loans that are offered on these peer to peer lending platforms can be very different. Here are things to watch out for.
Peer to peer lending platforms love to market high return rates of >15% or >20%. It usually states: “Earn up to X%”. These numbers are high in most cases so never count on them. To get a better feel for what to expect check out the loans on offer and their interest rates.
Because P2P lending is not mainstream, the risks are significant so factor that in. Also, many platforms offer loans in currencies which have high inflation rates. Remember to deduct the inflation rate from the interest rate in order to get a better picture of your actual returns.
Loans can be repaid over longer or shorter periods of time. Each one has it’s pros and cons to an investor. The main consideration that you as an investor need to have is your investment strategy.
Do you want to invest in long term loans? (Less risk of capital sitting around, more stable returns) Do you want to invest in short term loans? (easier to get cash out of the platform in case you need it). Maybe a combination? How much liquidity do you need on your investment?
Diversification of investments usually means spreading risk. If the platform you are using offers loans in many currencies, many countries, various types (personal, mortgage…) it offers the possibility to diversify. Having the possibility to diversify your portfolio means that there are more options when it comes to investment strategy.
Maybe you want to diversify your in order to reduce risk, maybe you do not want to diversify in order to get higher returns. The more options the better as your portfolio can be very fluid and you can adjust it as you go.
This one is simple. A fresh supply of new loans is a requirement so that your capital is not sitting and waiting around doing nothing. In case your investment is just sitting on the platform for days without and it is not invested you are losing money. In case there is not a large enough supply you will be competing with too many other investors. Loans will have lower interest rates as supply of capital is larger than the supply of loans.
Some platforms offer insight in to statistics. Check them out, especially the default rates for each different loan type and origin. look at the percentages in order to know what to expect with your investment. In case a platform is not making this available consider that the numbers are worst that any that do offer this information.
It is rare that peer to peer lending platforms have any hidden fees. They are primarily technology driven companies that want to solve a problem. On the other hand there are platforms that are more money driven and will hide many fees until you need to do something that has a fee attached to it.
Test out every feature that you are planning to use before making a commitment to a platform.
Check out basic things like depositing and withdrawal, transferring currencies, auto investment, buying loans manually, buying on the secondary market…
If a platform has more any fees for basic features (deposit, withdraw, invest…) consider it as a red flag. There are generally not good platforms and have more hidden fees you have yet to discover.
The most important features to look for in a peer to peer lending platform are:
- Buyback / Payback guarantees
- A variety of loan types, interest rates and duration
- Auto invest feature (that works)
- Healthy Secondary market
- Hidden fees are a red flag