Lending is a great business but lending mistakes can cause you to lose money instead of make a profit. Lending money is a good idea if you are looking to make some quick cash because everyone who borrows must repay with interest. Being a peer to peer lender also means that you lend at your own rates, which can be an extremely lucrative business for most people.
The only limitation to this job, however, is having to keep following up on people who have borrowed in order for them to repay, and statistics show that most people do not fully pay back what they owe, so there is a huge risk of losing your money. However, there are some excellent P2P platforms you can use to make your work easier.
These platforms are in charge of finding you the right clients, marketing your service to them and also they ensure to follow up until the loans are repaid. Unfortunately, you are required to pay them a specific for the service they shall provide for you.
Wanting high returns on your the money you lend is natural but can be one of those lending mistakes. If you come up with a high-interest rates can easily backfire on you. Also remember that the higher the returns, the higher the risk. When starting out in the lending business, it is important to start slowly and low. This will enable you to gauge the success of the business and also enable you to gain some trustworthy clients who are likely to borrow at high-interest rates later on.
What Are The 3 Lending Mistakes People Make
Not Having Enough Information
Of course, this business is a goldmine and you are likely to earn very high returns on your money through the P2P platforms, but you must first understand how the systems work. The dos and don’ts of this business is of primary importance to you, so you can best work the system. If you do not bother to understand even the basic rules of lending, you are likely to get into plenty of trouble.
Do not only focus on the returns but also seek to understand how financial instruments work. This gives you knowledge on how to maneuver the system. You will also be able to identify the right interest rates to charge your customers that will ensure they pay you on time.
Only Looking At Short-Term Returns
Don’t compare your P2P with other short term equity investments. Over the long term, a P2P investment could be just as good as an equity investment. This is one of the most common mistakes that is made by investors. It is important that you understand completely how the calculations are done. Most investors tend to think withdrawing their monthly returns is a good idea.
It is not. When you do this, you miss out on compounding your portfolio and expanding your investment. As a P2P lender, you should have long-term views of the investment and give it around 3-5 years before you can withdraw any funds. This is the best way to start seeing a good return on your investment. What they call “Compounding returns” shall only be seen after you re-invest your money.
Lack Of Proper Diversification
Not diversifying your investment portfolio is one of the big lending mistakes as it will affect your net returns. It is always advisable to spread your risk by dividing the total amount you have invested among many borrowers. If you are lending to just one person, or very few, in case they default, then you shall end up losing all of your money, but if you have lent to many people at the same time, if some of the default, you are still going to make some of the money from the other borrowers who do not default.
You must also give proper attention to the default rates. You shouldn’t be stunned and paralyzed when the borrowers delay their repayments. It is important that you understand people sometimes delay in paying back what they owe. In this way, you shall be prepared for this and not take it too strongly. In fact, most P2P platforms usually disclose their default and delay rates. This enables you as an investor to either expect it or overlook this.
3 Lending Mistakes People Make Conclusion
Understanding the system gives you a better idea of the risks involved in this investment. There are multiple avenues for you to invest with, and each, of course, comes with its own benefits and limitations. Using multiple platforms at the same time is a much better idea, than relying on only one P2P network.
You must also be very keen on how you do business because lending mistakes can make it one of the scariest options due to the high risk of losing your investment. On the flip side, if you do your research, you can also end up with high returns. As long as you’ve done your homework, you should be confident in whatever choice you choose.