The P2P lending industry is expected to be worth $589 billion by 2025. This makes it an amazing investment opportunity you can get into now.
However, if you want to make the most of your investment, there are a few P2P lending strategies you have to follow. Making the wrong move could cause you problems in the future.
Keep reading to learn about some of the best ways you can increase your investment value with P2P lending.
Table of Contents
What Is P2P Lending?
Before we get to the strategies, let’s define P2P lending and look at how it works. This will help you understand how important each of these strategies is.
P2P stands for peer-to-peer lending. It’s an opportunity for you as an individual to lend money to other people through a secure platform. As that person pays back the loan, you earn interest on it.
You don’t need a huge amount of money to get started, either, so don’t think you need to fund each loan in its entirety. Instead, you fund a loan alongside a myriad of other investors so that you all take on the risk of the loan.
Best P2P Lending Strategies
Now we’ll dig into a few of the best P2P lending strategies you can put into place to ensure your investment continues to grow over time.
This is one of the most important rules of investing and it holds true for P2P lending as well. You want to make sure you have a good mixture of loans that you’re investing in.
Here are three of the things you should check to make sure you have a well-diversified portfolio:
- Type of loan
- Borrower’s credit score
- Borrower’s job industry
Let’s consider the job industry for a moment. If you only invest in loans taken out by those in the oil industry, for example, what happens if there’s a change in the law that makes those jobs obsolete? Now those borrowers may not be able to pay back their loans.
As you earn back interest from your loans, don’t forget to reinvest that money. This will allow you to continue to earn more interest as you increase the total amount of your investments.
This is particularly important since P2P is a long-term investment. If you want it to keep growing, you have to keep putting the money you earn back into new loans. As we’ll talk more about later, there will be a time to stop reinvesting.
3. Evaluate Risks
With any type of investment, you need to evaluate the risk before jumping in. With P2P lending, it’s easy to see how risky each loan is based on the borrower’s credit rating. The platform will check each person out when they apply for the loan so you can see their rating.
Those with a lower credit score are considered higher-risk borrowers. This also means they’ll have to pay a higher interest rate. This can be beneficial to you as you’ll earn more on that loan compared to another one but they’re also at risk for defaulting on the loan.
Consider the type of loan along with the credit rating. For example, if someone is getting a debt consolidation loan, they may have a low credit rating because they’re struggling to pay off so many debts at once. However, with one loan payment, they’ll be able to easily cover the cost each month.
4. Set Goals
Why are you getting into P2P lending? Is it to diversify your investment portfolio? To generate passive income? To be able to retire early and live off of the interest?
Think about why you’re getting into this and that will help you come up with the best strategy for you and your situation. For example, if you only want to earn a little extra passive income, your strategy will be different compared to if you’re hoping to retire on the interest in ten years.
You’ll also want to think about when it’s time to stop reinvesting your money. In most cases, that will be when you retire. At that point, you’ll want to make the switch and start withdrawing money every month instead of putting it back into new loans.
5. Make Plans
Use your goals to create a plan for your investments. It will take some work, but figuring out how much you need to invest every month to reach your goals will make it easier to accomplish them.
Here’s an example. If you want to be earning $1000 per month in interest alone, you need to have a total of $10,000 invested if you’re getting an average of 10% interest rate. If you want to accomplish that in five years, then you need to invest $2,000 every year.
Most P2P investment platforms allow you to set up automatic bank withdrawals and automatic investments. So, you can easily set up everything once and forget about it but your money will continue to grow.
6. Stay Consistent
If you don’t choose to set up an automatic investment plan, then you need to make sure you stay consistent with your investments and your plans.
Once you have a strategy in place, stick with it and give it time to see how well it works for you. After a few months, if you’re not happy with the strategy you’re using, then you can try another one for a while.
7. Follow Sound Advice
Independent financial advisors are a great source of advice when it comes to how you should invest your money. They can help you choose a P2P strategy to help you reach your investment goals and offer other investment advice.
Get More Financial and Business Tips
Now you know some of the best P2P lending strategies you can use to grow your investment and reach your financial goals. As you can see, these are simple to implement and you can start earning money fast.
To learn more ways you can increase your net worth, keep reading our blog. It’s packed with lifestyle and business tips so you can save money, make money, and gain financial freedom.