Peer-to-peer (P2P) lending platforms are becoming a popular investment option for those looking to earn better returns than traditional savings accounts. They allow you to lend money directly to individuals or businesses without banks. However, like any investment, P2P lending also comes with its own risks.
Here’s a brief guide on the common mistakes to avoid when investing in P2P platforms.
Not Understanding P2P Lending Risks
One common mistake when investing in P2P lending is not fully understanding the P2P risks. P2P lending involves lending money to people or businesses, bringing in the risk of borrower defaults. If borrowers do not repay their loans, you could lose part of your investment. So, make sure you understand and are comfortable with these risks before you start investing.
Not Diversifying Your Investments
Another mistake is putting all your money into one loan or P2P investment plan. If the borrower defaults, you could lose all of your investment. If you wish to reduce this P2P lending risk, then you must diversify your investments. And this means spreading your money across multiple loans/investment plans. This way, even if one borrower fails to repay, you would not lose everything.
Also Read: Diversifying Your Investment Platform
Ignoring the Borrower’s Credit Score
Before you invest in a loan, you must also check the borrower’s credit score. This score shows how reliable the borrower is at repaying loans. If you somehow ignore this information, then it could be a big mistake as borrowers with low credit scores are more likely to default. So, always invest in borrowers with good credit scores to reduce your P2P lending risk.
Going for High Returns Without Thinking About Risks
It is quite easy to get attracted by high returns. But you should also keep in mind that higher returns usually come with higher risks. Loans that offer high interest rates may involve borrowers who have poor credit histories or unstable businesses. These loans have a higher chance of defaulting, which in turn, would increase your P2P lending risk.
Overlooking Fees
P2P platforms usually charge fees for their services. Some charge a percentage of the interest you earn, while others may have loan-processing fees. Make sure you do not ignore or overlook these fees as they can lower your actual earnings. So, before you make an investment, do calculate how much you are going to earn after deducting all costs. Always be sure to check the fee structure before investing to avoid any surprises.
Choosing Unreliable Platforms
You cannot trust all investment platforms blindly as not all peer-to-peer lending platforms are trustworthy. Some may not have the right systems in place to protect your money and numerous are not efficient enough to provide you good offers and returns. Hence, make sure you always choose a platform with a good reputation and clear safety measures. Platforms like 13Karat offer a secure environment for P2P-enabled investments as they have well-structured plans for their users. Choose a trusted platform so that you can minimise your P2P lending risk.
Also Read : Why You Should Choose P2P Platforms
Conclusion
These are some of the common mistakes you can avoid when investing on peer-to-peer lending platforms. If you are looking for a safe and easy way to start investing in P2P-enabled options, consider the 13Karat app. Our 3-month and 6-month investment plan are perfect for those looking to grow their money in a short period. These plans offer great returns of up to 13% per annum.