6 P2P Lending Mistakes
When starting out with P2P lending, you’ll make mistakes. Heck, we’ve done all of them, and we’ve paid for it. But, mistakes are sometimes the best way to learn and progress.
In this article, we will share six mistakes that you will most likely make as a newbie P2P investor, and how best to avoid them. In short, we’ve made the mistakes and lost the money so you don’t have to!
Here's a quick overview:
Keep reading to find out more about safe and lucrative investing!
Mistake #1: Believing Everything You Read
P2P investments always come with certain risks, and because of this, lending sites like to make their investments look less risky than they actually are.
It’s common that certain P2P lending sites tend to diminish those risks with terms like ‘secured investments’, ‘buyback guarantees’ and ‘provision funds’.
No P2P lending investment is risk-free.
Great, because no one can guarantee positive results. So, if someone promises you easy returns, you should be very cautious when choosing whether to invest with them.
Some platforms even promise a ‘safety blanket’. Safety blankets are great until seven loan originators get suspended and your money is gone.
The same goes for reviews published on seemingly popular sites like Trustpilot.
Do you think that a P2P platform is the “best and most transparent” by not publicly revealing their lending partners or by not addressing the fact that the CEO was previously connected to fraud?
Unfortunately, even the reviews on ‘trustworthy’ sites are sometimes written with a bias. You should also always check the accuracy of the review.
Where can you check this information then? Well… Some of the reviews by bloggers are quite outdated, but the reviews on P2P Empire are kept up to date - at least for the most popular platforms.
Our advice: Proceed with caution! Always check the accuracy of the information before you act on it.
Mistake #2: Ignoring Red Flags
Another mistake that you should avoid is to ignore all of the red flags, and that gut feeling telling you not to invest! Before you decide to invest on any P2P lending site, you should conduct your own due diligence about:
- The platform’s terms and risk management
- The team behind the platform (including owners)
- The platform’s partners: loan originators or borrowers
This can be a time-consuming task, which is why we have added a ‘red flag’ section in every single one of our individual P2P lending platform reviews, where we are listing all known red flags that can have an impact on your investments.
If you don’t do your own due diligence but invest on a P2P site because it promises high yields, you risk losing your money.
Not that your diligence process will always spot ‘bad platforms’ it is a good way of decreasing the chances of being scammed.
Have a look at some of the red flags that you should be aware of here.
Our advice: Complete thorough due diligence and follow that gut-instinct. Don’t ignore the red flags!
Mistake #3: Investing In High-Interest Investments
It’s very appealing to invest in loans that promise a high interest of 20% or more, but you will likely see those projects on platforms that are the least transparent within the industry. And they exist on less transparent platforms for a reason...
In fact, we haven’t seen a single platform that offers these kinds of returns be open with their risk management process or provide a full overview of the borrower (usually a company) and its availability to repay the loan.
Those platforms typically also don’t publish regular updates about the project and the repayment plan.
Our advice: Stay away from those platforms. The risk of losing all your money is 50:50.
Mistake #4: Setting Up Your Auto Invest Without a Distribution Plan
Auto Invest is a tool that allows you to set up your automated investment strategy, so that instead of investing manually, you can let the auto invest tool do the heavy lifting.
This is one of the most used tools within P2P lending as it saves investors a ton of time.
The problem that you new investors often don’t realize is that most auto invest tools (like those on Viventor, PeerBerry, Iuvo Group or Bondster) don’t distribute your investments equally across all lending companies.
When using these auto invest tools, you need to create individual auto investment portfolios otherwise you’ll always invest in the loans from the lending companies that have the largest number of available loans at a given time.
Why is this a poor investment strategy? Ignoring the distribution of your portfolio increases your exposure in certain lenders and by extension of that, your risk.
You should set up your auto invest tool in a way where you distribute your investments equally across profitable and well-established lenders to decrease the risk of default.
Our advice: We suggest you refrain from using ‘one-click’ investment tools like Invest & Access or Bondora’s Go & Grow. You certainly won’t yield the highest returns by using them.
Mistake #5: Being a Passive Investor
P2P lending is often portrayed as a passive investment strategy. How you treat your investments is completely up to you, but if you’re a passive investor in 2020, you’ve already lost at least some of your money and the chance of losing more is real.
Signing up to a P2P lending site, investing capital and letting the investments compound is a strategy that worked two years ago.
But, unfortunately, not monitoring what’s going on within the P2P lending space is quite risky nowadays.
We suggest you follow all the news surrounding your investments.
You should read the latest announcements on the platform’s blog, experiences of fellow investors in Facebook groups, and/or follow the conversation in dedicated Telegram threads.
With a bit of research, you’ll more likely spot the early signs of a P2P lending scam and withdraw your investment before it’s too late.
You should also login to your investor account at least every three weeks to check on delayed or defaulted payments from suspended companies.
Not keeping up with the latest P2P lending news can be very expensive in 2020.
Our advice: Don’t be a passive investor! Keep your eyes on news and contribute to the conversation.
Mistake #6: Not Taking Responsibility For Your Investments
P2P lending is still a rather unexplored asset class. Many newbies aren’t fully aware of how it works which is why they might rely too much on reviews from bloggers and self-proclaimed experts.
This can be very dangerous as it will give you a false sense of security.
Be critical about what you read - even about the information here on P2P Empire.
Use a variety of resources and determine for yourself whether it’s a platform that is a good choice for you.
In fact, before we test or review a P2P platform, we always send a set of questions over and, if we’re not happy with the answers, we don’t invest. Instead, we write a review/update an existing review of the platform, so you can know about our findings.
You should do the same before signing up and investing your money.
You will feel much better about your investments if you understand the whole business model behind the platform.
Our advice: Don’t just read reviews, but reach out to the companies yourself!
Summary and Final Thoughts
This post shouldn’t discourage you from investing but rather be a source of education so you can invest safely, and know what to expect should you make any of these mistakes yourself.
Here is a brief summary of the key takeaways:
- P2P lending isn’t risk-free: don’t trust everything you read
- P2P lending reviews don’t always portrait the reality as they aren’t accurate or outdated
- Don’t ignore red flags, it’ll likely be an expensive mistake!
- Avoid the high-interest loans, they’re usually not worth it
- Distribute your investments equally across profitable lenders
- Avoid using ‘one-click’ investment tools that promise high liquidity
- Be an active and responsible investor
Monitoring your investment portfolio is one of the most important tasks this year. We keep a close eye on the P2P lending industry and send out regular newsletters to keep you updated.