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P2P Lending India – 11 Tips To Keep In Mind

P2P Lending India
Written by Dhruv Talreja

P2P lending is a simple model where people with surplus money lend it to the ones who need it. The borrower pays back to the lender over a fixed period of time usually in monthly equated installments. P2P lending has been booming in India post demonetisation and has witnessed increased investor participation. Given that P2P Lending India is now being regulated by the RBI (Reserve Bank Of India) it is still essential to keep some things in mind while lending as in this model the entire credit risk is borne by the lender. So lets straight dive into these tips!

P2P Lending India – 11 Tips To Keep In Mind

TIP #1: DIVERSIFY – P2P LENDING India

I can’t emphasise enough on this point. Diversification is the most important secret to successful lending in P2P loans. One needs to diversify across as many people as possible. This way you can protect your portfolio from sudden non-repayment shocks. Spreading your money across people, so that in case certain people don’t pay up on time or default your portfolio doesn’t tank in one go.

TIP #2: Eye All Types Of Diversification

Not only you should diversify your money into small chunks across multiple borrowers you should also eye diversifying across various kinds of borrowers to eliminate large-scale risks. E.g. giving all loans to the borrowers employed in the IT Sector poses a risk. A large-scale negative impact on the IT sector can leave an adverse impact on your portfolio. It will diversify across different employments, credit scores, loan purposes etc.

TIP #3: Lending Through A Reliable Platform

Do thorough research before opening an account on any platform. Always look for a platform that has got the RBI approval and is in operations since a while. Speak to existing lenders of the platform and read reviews about them on various blogs, Quora or maybe on LearnP2P!

Question the platforms for any small doubt you have, after all, it is your hard earned money you are investing through their platform. Speak to them regarding what they do in case of delays or defaults. Understand the entire process of P2P lending India before jumping into it. You may want to read more articles on the process of P2P Lending on our blog LearnP2P!

TIP #4: Take Informed Lending decisions

Understand that the borrowers on these platforms are high risk. Not only that the borrowers have been verified by the platform through various stages, but you should also verify the details once for yourself and then invest. Understand the types of risks these borrowers bring, their employment, their income, their debt/income ratio etc. You don’t need to invest in all the loans available on these platforms. Be selective and don’t forget Tip#1.

TIP #5: Plan your Lending 

Remember that you are lending your money for a fixed tenure and that most of the Indian Platforms still don’t have secondary marketplaces to sell the loans you have invested in. E.g. you have invested 1 Lakh spread across various loans and tenures. You will be getting the repayments principal + interest over a long period of time in equated monthly instalments. You can’t press a button and liquidate your investment (at least for now, until secondary marketplaces go live in Indian Platforms)

TIP #6: Remain Invested

P2P lending isn’t a short-term business, stay in it for the long term. Don’t let the money sit idle if you have investable options. Diversify and have a long-term approach to get better returns and lender experience.

TIP #7: Lend As Per Your Risk Appetite

As I said earlier, you do not need to invest in all the loans being listed on these platforms to be successful. You need to choose the borrowers that fit your risk appetite smartly. Choose the borrowers with tenures that suit your investment horizon. Don’t take on too many long-term loans such as tenures >24 months in case you need liquidity in your investments. Consider the interest rates, the debt-income ratio of borrowers before lending and make informed lending decisions.

TIP #8: Reinvest

I can’t lay enough emphasis on this point. You need to keep reinvesting the repayments to let the magic of compounding kick into your investments. You can follow any of the two strategies.

  • a. You can either invest all of the repayments into fresh loans (However remember that you are again locking in your money for a fresh 1, 2 or maybe three year period)
  • b. Or you may reinvest only the principal part of the repayment and take the interest as income.

TIP #9: Auto Invest – P2P LENDING in India

A lot of the Indian Platforms now offer Auto Invest service where you set the parameters of the borrowers, and in case fresh listed loans match those they auto invest the money for you. It is good for large investments amount >50K, and this approach saves time. However don’t go for it randomly. I suggest you manually invest in the start for a small period and understand the types of borrower profiles that suit you and then set up those profiles as criteria for reinvestment.

TIP #10: Keep Learning & Be Updated

Read blogs and other material to stay abreast with the lending industry. You should check your lending account once a week, as usual, repayments come in spread throughout the month. Platforms do this as different borrowers have different salary dates and to collect it on time they set the EMI date close to the salary date. In case you get repayments to choose to reinvest them rather than withdrawing them.

TIP #11: Choose The rates Wisely

You should not just eye the borrowers with high-interest rates, remember that they carry high risks thus the high rates. You should manage to spread your money across borrowers of various profiles and interest rates to keep your portfolio healthy and diversified. To know about 5 Common Mistakes Lenders Make – P2P Lending India click here.

That is all for now about p2p lending India, see you guys in the next one till then keep reading LearnP2P!

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Dhruv Talreja

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