5 Common Mistakes made by P2P Investors/Lenders

We make frequent mistakes in our daily routine. The same goes for investments because of the uncertainty, thus it becomes important to minimize the common mistakes we make as an investor. Peer to Peer lending is one of the latest and the fastest growing investment platforms in India but it comes with risks. Considering the huge pool of borrowers looking for short term and midterm loans, there is a huge potential for new lenders to invest their money for higher returns than equity. But before you start investing your hard earned money, it’s important to know about some common mistakes made by Peer to Peer lenders, which are as follows:

1. Investment without research – Before you start investing, you need to understand not all investment platforms follow a transparent process, so it becomes very important to do a thorough research. In addition to that sometimes new investors don’t have proper product knowledge which results in bad choices. The most common mistake one can do here is missing out on the product policies & charges associated, which can reduce the final return you get. Thus, a proper research about the platform, the products on offer & most importantly the numerous risks associated will help you to invest in the right way.
2. Lack of diversification – It is rightly said that never put all eggs in one basket, same fundamental works with financial investments, diversification is the key to reduce risks and improve returns. For example, let’s say Investor A puts all the money in a loan with high returns and unidentified risk. Investor B on the other hand puts money in three different loans with low risk, medium risk & unidentified risk respectively. In case the borrower with unidentified risk is not able to make the repayment then Investor A will end up losing all the money while Investor B would minimize losses by getting returns from the other two loans. In P2P lending, there are different types of risks associated with different products as well as borrowers, thus it becomes important to maintain a portfolio where you invest across them. This in long term helps to suffer least from defaults.
3. Not understanding risks associated with borrowers’ profile – Considering diversification is very important while investing, but lending money to different borrowers with lower credit score could result in a disaster. It is very important to go through detailed information of all the borrowers, which will reduce the risk associated with your investment in his/her loan. For example, a borrower with a good monthly salary might look good to you, but that is not the only criteria because he/she might already have an ongoing loan which effectively can affect the repayment. Also, CIBIL score helps in determining the credibility of a borrower, so never ever miss it.
4. Aggressive approach –This is a very rookie mistake usually made by new investors. If you are just starting out, in lieu of higher returns, you might directly go for high risk investments. Don’t forget there is more volatility involved here thus as a new investor, if you are not managing it actively, then it can backfire. Whenever you are investing in a new financial product, it becomes important to start slowly and first understand how it works. Same goes when you invest in P2P lending, always start with small investments across different products and after gaining adequate experience you can decide on how to build your portfolio for long term. Believing that all products are good investments is a big mistake.
5. Looking for quick returns – The biggest asset in investment is Patience. If you are looking for returns from Day 1, Peer to peer lending is not for you. Sometimes new investors just see the high returns and go for P2P lending investment, but suddenly realize that it takes time to get the returns they have been promised. It works the same way banks provide loans; so there is also a risk of delayed repayments which cannot be ruled out. In P2P lending, reinvesting the money earned from returns helps you in successfully implement a long term approach, so be patient and earn higher returns with moderate risks.

Mistakes made while investing can never be eradicated but it is very important to minimize them and constantly learn from them. In long term, this helps in building a portfolio with better returns and less volatility. We hope this article will help in the lenders looking to explore the P2P lending market.

LenDenClub is one of the foremost P2P lending platform in India. Here lenders can start lending money online to creditworthy borrowers which lists in our platform and may earn higher returns. Moreover, borrower can get P2P loans. www.lendenclub.com