Every salaried individual can relate to the woes of not having enough money. In spite of making a decent living, a lot of people aspire to tap into sources that would help them yield more from their hard-earned money. Amidst such a scenario, the concept of Peer-to-Peer (P2P) lending is emerging as an increasingly popular option among savers and investors.
P2P lending is essentially a financing model that enables individuals and businesses to borrow money without relying on a formal financial institution as an intermediary. Even though this form of lending has been an age-old practice, it has assumed greater momentum in recent times owing to a rise in the number of digital channels and it is being recognised as an alternate debt-financing model by the government. With the industry currently pegged at $3.2 million and projected to increase multifold to around $4-5 billion by 2023, there is clearly no better time than now to embark on this P2P lending journey.
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While this form of lending has been a boon for borrowers, it is just as yielding for the lenders as well. Here are some of the benefits that P2P lending may have for them:
Higher returns
P2P lending has the potential to provide lenders with access to considerably higher returns when compared to other types of investments. These P2P platforms charge a very nominal fee to connect lenders and borrowers directly without any bank acting as the third party, and this lack of intermediaries translates into lower costs involved and higher returns projected.
Autonomy
Many investors find it reassuring to know who exactly they are lending to and for what. P2P lending goes a step ahead in giving lenders not only profiles of borrowers but also the autonomy to choose who they want to lend to. For instance, lenders have the freedom to decide whether they wish to facilitate a secured loan or an unsecured one.
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Risk diversification
Interestingly, P2P platforms allow lenders to spread the capital across multiple loans for better mitigation of risks. For instance, if a lender is investing Rs 1 lakh, they can choose to have it spread over 100 loans so that in case of a default, the potential loss would be Rs 1,000 only.
Personal satisfaction
P2P lending has a charitable tinge to it. Considering how most of the borrowers registered on these platforms were previously deemed ineligible for a loan by formal financial bodies, lenders realise that they are doing a good deed by making this investment. Therefore, a lender may derive a sense of compassion and personal satisfaction through such lending experiences.
How to be a smart investor
Similar to other investment avenues, P2P lending also comes with its share of credit risks. However, if approached in a smarter way, this can prove to be a very lucrative opportunity. For instance, it is commonly known that higher returns come with higher risks, and vice versa. Keeping this in mind, a lender should build a diversified portfolio of smaller loan amounts invested across a large number of borrowers. This portfolio should have a good mix of all categories of borrowers, ranging from low risk-low returns to high risk-high returns. This will help ensure profits and keep default risks at bay to a significant extent.
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Furthermore, lenders should approach P2P lending from a long-term purview to truly maximize their returns. Re-investing even a partial amount monthly, for example, will help ensure a compounding return on investment. Most importantly, lenders should make it a habit to keep a track of the portfolio performance. While this maybe a time-consuming exercise, it will help them keep a bird’s eye view on the returns along with additional performance metrics, thereby enabling them to undertake any course correction, if needed, to maintain and enhance higher returns on investment.
Approaching this mode of investment in such a smart way thus has the potential to be one of the most fruitful modes of investment, especially for salaried individuals. P2P lending is definitely here to stay, and the sooner you sow, the faster the bounty will be to reap!
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The author is the Head of Marketing and Products at RupeeCircle
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