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Top 15 Tips for P2P Investing
The P2P investment market is young and growing quickly. There are many different platforms, and the market is not yet efficient. The returns to investors can differ by as much as 6% p.a. for loans with the same risk profile. Explore P2P was created to help investors gain an edge and ensure they are getting the highest returns available. Our 'compare platforms' page compares the returns available from more than 40 UK and European platforms.
Tip #2 - Diversify, diversify, diversify
Diversification is the first rule of investing and it definitely applies to P2P loan investing. We recommend investing across multiple platforms, loan types, geographies and lenders. Ideally, no single loan should represent more than 0.5% of your P2P portfolio. Assets should be allocated to the platforms that offer the best risk adjusted returns, track record and customer service.
Many of the leading platforms in the UK and Europe offer sign up bonuses that are credited to customer accounts . They are either fixed amounts (often £50-100) or a % of the amount invested (typically 0.5-1%). They can be a good way of boosting returns early on. Our 'sign up bonuses' page has all of the latest offers available from the platforms we monitor.
Secondary markets can be a good way to create a diversified portfolio quickly. There are times when platforms have limited availability of new loans (the 'primary market'). Secondary markets can also provide liquidity to investors needing to raise cash. Always look at the payment history of a loan before purchasing it. Avoid loans that have been frequently in arrears in the past. Stay away from loans near to the maturity date - sellers may have doubts about the ability of the borrower to repay.
Tip #5 - Favour secured loans
There is a role for all types of loans in a diversified P2P portfolio. However we believe that the majority of loans held within a P2P investment portfolio should be secured by real estate or other hard assets (such as vehicles, machinery, jewellery etc). Secured loans have more stable returns across the economic cycle than unsecured loans. This is because they tend to have lower rates of default, and significantly higher rates of recovery.
One of the lessons from the last financial crisis was that liquidity can dry up very quickly, and in unexpected ways. Most P2P secondary markets are currently very liquid. Loans can usually be sold quickly at fair prices. However, no one can predict whether these markets will continue to be liquid during the next crisis. Secondary markets should not be relied upon to provide a future 'exit'. Instead, they are a tool to rebalance a portfolio, sell loans that are not performing as expected, or to capture profits for loans with high demand.
Investing in loans abroad has multiple benefits. This provides increased diversification of risk, and in many cases can offer higher returns. Some platforms provide hedging services which allows investors to invest in their home currencies (for example Twino offers GBP investments into Euro denominated loans). For investors that do not want to have any currency risk, FX hedging is simple to perform through spread betting markets.
Tip #8 - Perform your own research
Don't rely entirely on the information provided by lenders and platforms. For larger investments, it is worthwhile performing a quick check of the information provided, such as the value of collaterals. This information is relatively quick and easy to access, and can help to avoid unexpected losses down the line.
All investments have risk. P2P investing is no different. We strongly recommend that you read our 'What are the risks?' page. Successful investors understand these risks, take steps to minimise them, and also accept that they are unavoidable. It's not possible to eliminate all risks, but there are many practical steps investors can take to minimise them.
To maximise returns, investors should monitor each P2P account to ensure that investment returns are in line with expectations, cash held on account is kept to a minimum, and the interest rates are competitive relative to other opportunities elsewhere. Visit our comparison tables regularly to ensure that you are earning the best returns available.
Tip #11 - Use autobidding selectively
Autobids allow investors to automatically purchase loans that have predetermined characteristics such as interest rate and risk grade. Autobidding is most suitable on platforms where all the loans available are similar, and there are few advantages from manual selection. There are some potential pitfalls though. It is important to set a minimum interest rate, and set it at a level close to current interest rates available. Other metrics such as loan status and risk grade should also be selected carefully.
Tip #12 - Payment history is valuable
Most platforms provide payment histories for each loan, showing the date of each loan repayment, and whether it was made on time. This can be valuable information, as it provides an indication of likely risk of future default. Borrowers who have made payments on time for several months have a lower probability of default than new loans without payment history, or for borrowers that have had several overdue payments. Investors often place onto the secondary market loans that have recently become current after spending long periods overdue. These loans should be avoided.
Tip #13 - Be tax efficient
Over the coming 12 months, many of the British P2P platforms are likely to launch facilities that allow loans to be acquired through tax efficient ISA (savings) and SIPP (pension) schemes. Some platforms also facilitate tax planning by permitting sub-accounts to be created in the names of spouses and family members who may have lower marginal tax rates than the lead investor. It is worth consulting with a tax advisor to ensure that these benefits are fully captured.
Tip #14 - Act quickly when necessary
Some of the most attractive loans are taken up very quickly by investors. Some of the platforms offering the most compelling opportunities often pre-announce when new loans are being released. Some of these platforms act on a first come first served basis, while others perform a selective allocation, in an effort to give as many of their investors a fair share of the spoils. Investing in these popular loans can be frustrating and take up time. However, the returns that these loans can generate will be worth the effort to most investors - being competitive has a payoff.
Tip #15 - Have a strategy for duration
Investors can typically purchase loans with durations ranging from as little as one month up to 7 years. A short duration portfolio is more liquid, but it creates re-investment risk. We believe there is a high risk that the returns available to investors may fall in the future, as more investors compete to purchase loans. Some platforms have already stopped accepting money from new investors. Purchasing some longer dated loans reduces this reinvestment risk and 'locks in' some future returns.