With interest rates still pitiably low – currently 0.5% in the UK – and not looking likely to increase any time soon, there’s little wonder that savers across the country are looking for new, low-risk ways to make their money work.
Taking those first few steps away from the safety of the stagnating bank account and into the more vibrant realm of speculation can be scary for the DIY investor, so unless you’re a secret thrill-seeker searching for a little jeopardy to get your kicks, it’s important to find an investment medium that can deliver comfortable returns without also delivering a daily heart attack. If that sounds like you, then P2P (peer to peer) lending could be the answer.
If you’re not already familiar with the concept, P2P loan investment is the process by which borrowers who are unable (or unwilling) to gain funds through traditional banking methods – such as new business startups, or individuals without property or capital to use as security – have their lending needs fulfilled via crowdsourcing. Individual investors can select which loan propositions best suit their criteria, and then fulfil as much or as little of the loan request as they wish. In return, they receive a proportional amount of the borrower’s monthly repayments, until the loan and the stated interest rate are paid in full, leaving all parties happy.
How P2P Loans Have Gained Momentum
P2P lending began as a neat solution to the straitened banking systems following the financial crisis. With new legislation preventing banks from issuing loans to a huge number of potential borrowers, people were left to search for alternative financing means. At the same time, savers were experiencing catastrophic interest rates – just 0.25% from 2009 to November 2017 – meaning that everyone from retirees used to living off their interest, to young families saving for a mortgage, could do nothing more than watch their savings dwindle as inflation and the cost of living crept higher and higher.
P2P lending provided a perfect solution, allowing borrowers to access the cash they desperately needed, without having to turn to the exorbitant interest rates of pay-day lenders, while investors experienced gains that no bank could hope to compete with. It is this mutually beneficial relationship between borrower and investor that made P2P such an instantly successful model, and has seen the market grow and grow. From a base of nothing in 2011, it is estimated that the global P2P market will be worth US$1 trillion by 2025. Most experts are now positing that the market will continue to grow and grow, meaning that there will be no return to the financial autocracy of the banking systems prior to the 2009 crash. No wonder so many people are becoming involved.
How to Start in P2P
With P2P providing such a stable market, it makes the ideal base from which to begin an investment portfolio. It’s quick, it’s easy, and because you can do everything yourself – no need for brokers, or even much knowledge beyond plain common sense – there are no hidden fees to eat into your return.
To begin, you simply need to create an account with a P2P investment platform, deposit your funds and then look through the list of available loans before selecting where to put your money. The process really is that simple. Of course, it does come with some risks, but if you research your platform and select your investments wisely, you can easily mitigate those risks to a point of inconsequentiality. That’s the real key to success, but how do you even start to find the door?
How to Succeed in P2P Investing
While, when it comes to any form of investing, there is no fail-safe formula, there are steps that you can take to first, protect your assets, and second, to increase your chances of a worthwhile return. Some of these steps can be applied in broad brushstrokes to all forms of investments, others are more specific to P2P.
If there is one single golden rule of investment success, it has to be diversification. While everyone knows the adage of not putting all of one’s eggs into a single basket, it can be easy to forget the sense of this when you think that you’ve found a killer investment. The thing is, even if something looks like a sure bet, you can’t be absolutely, 100% certain that it’s going to succeed, so even though, for example, we’re completely positive that the FastInvest ICO is going to be a huge success, we still wouldn’t tell you to put every last penny into it, simply because it doesn’t make good business sense to put all of your assets in one place.
Diversification can spread your risk so thinly that if done properly, any potential losses will be completely absorbed by your gains, so you won't even notice that they've happened unless you look into the paperwork in detail. So, if you’re thinking of starting investing with £100, split it between five different opportunities – whether five P2P loans, or a mixture of digital and fiat options – that way, if one fails, the other four will cushion the blow.
Depending on the type of investment that you opt for, there are also a variety of tools available to help maximise your return. Many people prefer to retain complete control of their assets, which is fine, but if you’re leading a busy life you can often miss out. Auto investment tools – such as the one developed by FastInvest for P2P – use algorithms to recognise new potential investments based upon user’s pre-selected criteria. This means that your money is never idle – in P2P, for example, when your monthly return gets paid, it can be automatically reinvested in a new opportunity, and thus your income continues to grow, while you continue to go about your normal business. It’s one of the quickest ways to generate a passive income.
Once you’ve settled on your investments your focus needs to shift to your net return; this is how you will be able to ascertain whether your strategy is working. Because P2P is a slightly slow-burner (although most contracts are only 1-12 months) it’s best to leave a short time before studying your returns; twelve to eighteen months is ideal, as this will give your original investment time to mature and complete, so you’re able to take an overview of the entire cycle.
Carry out the following equation:
Take the current value of your assets and deduct the original value (or the value at the start of the time you’re reviewing), then minus any fees incurred.
Divide this figure by the original value, then multiply that by 100%.
That will give you your basic rate of return. For your true net return, however, you will also need to deduct the rate of inflation for the investment period – so at the moment in the UK that is 2.8%.
This equation will show you exactly what your investment has given you in real terms, allowing you to make an informed decision about whether this form of investment is working for you.
There are lots of external factors that will influence the above, many of them will be entirely out of your control – such as the economy and the borrowers you’re working with – but one of the biggest influencers is one that you can manipulate; the platform you are investing through.
Different P2P lending investment platforms charge different fees and offer different protections and different rates of interest, so it’s important to look carefully before you place your money, as surface numbers are rarely what they seem – even a promised 20% ROI can be quickly eaten if the platform takes a 19% cut. Then you need to look at other factors beyond return rate. Unlike the majority of other platforms, however, FastInvest also provide buyback and default guarantees, meaning that should you need to withdraw your investment suddenly, FastInvest will purchase the remainder of your term from you and return your assets within 24 hours, and if a borrower defaults on their payment, FastInvest will cover the deficit, thus removing the greatest potential risks from this form of investment.
P2P loan investment is not inherently risk-free. Neither does it guarantee a high rate of return. As an investor, you have to play your part. It’s down to you to research what’s available; to look at the fees and securities that are on offer; to spread your investments to avoid having them be swallowed whole by an unsuccessful venture; and to utilise the tools available to you. IF, however, you do all of these things, you stand a really good chance of making yourself a passive income that’s really worth the having. Give it time, reinvest your interest, make every penny work for you and before too long your original £100 will have numerous new friends to play with.