“Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1,” so said business magnate, investor, and philanthropist Warren Buffet, when asked if he had any golden rules when it came to investment.
And as rules go, we have to admit that those two are pretty good. That is looming, and understandably frightening threat of losing all of your money is what puts many people off leaving the safety of their idling savings account and putting their cash out to work in safe investment portfolios. Because investing money is risky, isn’t it? It’s also stressful and hard, and all sorts of things can go wrong. That is why a lot of people are unable to leave traditional finance institutions. But, If you find the right momentum and go about things the right way, you can easily find yourself the proud owner of an independently passive income with minimal risks involved.
What is P2P Lending?
P2P is like an online dating service for finance. People looking to borrow funds away from traditional banking pathways list their vital statistics on a lending platform for interested investors to find their perfect match. Relationships are formed, borrowers and investors may both ‘see other people,' then at a mutually agreeable time go their separate ways; the investors are usually looking for a borrower for a "short-term relationship."
Of course, it’s not quite as simple as that; when dealing with trustworthy platforms, such as FastInvest, borrowers have their eligibility assessed before their loan request is opened to investors. Their credit rating is checked, and the likelihood of them being able to meet their monthly payments is evaluated, helping to reduce the risk of lost assets and unhappy investors. In essence, though, it is similar to dating; each partner is looking for a way to improve their fiscal viability; the borrower needs temporary funds, and the lender requires a way to enhance their income. It’s a mutually beneficial relationship.
How Does P2P Lending Compare to Other Forms of Investment?
One of the main features of P2P that appeals to new starters over other forms of investment is that it's easy to start small. With many of the P2P platforms, you can begin your portfolio with minimum funds. For example, with FastInvest you can start from as little as €1 – which means that you can test the water before you jump in. Of course, starting with a single Euro isn’t going to make you rich, or even be a particularly good way to take stock of your potential for return, but it does give you an opportunity to play with the platform. And while there is some risk involved, with the possibility of borrowers defaulting on payments, this can be reduced by diversifying your investments. As well Fast Invest offers one of a kind Money-Back Guarantee together with the leading BuyBack Guarantee in the market.
The main difference between the risks posed by P2P and by the other forms of more traditional investment options – shares, bonds, property, or even collectibles – is that P2P risks all come directly from the person or people that you are dealing with. While the others are created mainly by extraneous variables, such as the general economy and the specific market that you are trading in. For example, if you put your money into shares and the company experiences a bad year because they make olive oil and drought means that there has been a global shortage of olives, or there is a sudden influx of cheaper olive oil from a competitor country, then your return will be minimal. If the drought continues and the company goes bust, then you would lose your investment too.
Another difference with P2P is the duration of the investment. Most P2P loans are for a relatively short-term and you can see your return trickling in each month as the borrower makes their repayments and you get your proportional stocks of the whole. If you’re dealing in bonds, shares or property, then it’s more of a long-term process.
How Much Money Can You Make Investing in P2P Loans?
The answer to that question is very much ‘it depends.' It depends on which platform you work with, and it depends on how much risk you're prepared to take. The riskier the proposition a borrower presents, the higher the rate of interest they will deliver. But the riskier proposition means higher possibility of defaulted payments. Of course, you can mitigate this by spreading your investments, so if that one high-risk gamble doesn't pay off, the others should swallow the deficit.
Make sure you pick the right platform too. FastInvest offers 9-16% Return On Investment (ROI). All return rates are listed on each loan application, so you’ll never inadvertently find yourself working at a lower than the desired level. Not to mention that the loans are protected by BuyBack and Money-Back Guarantees.
What to Consider When Calculating What You’ll Earn Investing in P2P
As always, there is no one simple way to calculate what an investment will deliver, no matter which form that investment takes, but you can get a fair idea of what you could expect. The first thing you need to look into is your estimated net return.
Net return is important because it will let you know what you've left with once all deductions have been made: your actual gains for your efforts. While this doesn’t make allowances for potential losses through defaulting, it can give you a fair-weather projection. To work out, your possible net return do the following equation:
- Take the current value of your assets and add the percentage of stated interest;
- Deduct the original value. Then deduct any stated fees that are likely to be incurred;
- Divide this figure by the original value, then multiply that by 100%;
- That will give you your basic rate of return, but for a genuine return, you will also need to factor in the rate of inflation for the investment period.
This equation will show you what you can expect in the best-case scenario, and with any luck, the best case is all that you need to worry about, but it is worth thinking about where you will be in the worst case, should the borrower default on their payments.
How to minimize default possibility
Diversify your investments, that way if one fails you won’t have lost everything. So, if you’re thinking of starting investing with £1000 split it between ten or more investment opportunities. Diversification will spread your risk so thinly that any potential losses will be entirely covered by your gains, so you won't even notice that they've happened.
Look at the investment platform’s defaulting policy. FastInvest, for example, offers a BuyBack guarantee, so if the borrower you've invested in fails to make a payment, Fast Invest will cover that deficit in three days, meaning that you’re never left out of pockets.
Always invest what you can afford to lose. While no one ever likes losing money, everyone has a threshold of security – be it €20 or €200,000 – so never put in anything which could tip you over the edge.
Finally, when looking at your potential returns, it’s best to think long term. Or at least, medium term. Eighteen months is considered to be the peak time to assess whether an investment is working for you. In P2P that generally gives you the chance to have experienced a full lending cycle and to have reinvested your interest for a higher return – if you don’t have the time to do your asset juggling, the FastInvest AutoInvest tool can help. Do not forget to diversify your investments to lower the default possibility. By choosing the right investment platform and using all the possible tools to maximize your returns, you will be able to start building your passive income flow.