If you have identified peer-to-peer lending as a preferred choice of allocating money, there is some basic homework required. You are giving an unsecured personal loan. Moreover, you are giving the personal loan on an impersonal and agnostic platform. The big question is; how to identify whom to lend to?
Look at your risk and return requirements
This should be your starting point. Don’t take risks that you cannot afford to take in the quest for returns that are just not meant for you. Firstly, Peer-to-peer lending should be a very small portion of your overall investment portfolio. You can just use this platform to add some flair to returns. Secondly, the returns you expect must be commensurate with the risk you can afford to take. That is a key step to Lendforall on this platform.
Start small and start short end
Start in small portions and spread your risk. If you are starting off with Rs.50,000; don’t give the entire corpus to a single borrower. Once you know your returns; know your risk appetite. Accordingly, spread across a portfolio of borrowers who match your aggregate risk capacity. Apart from starting small, start with short tenure loans of 3-6 months. You can expand commitment after you test waters and also test clients.
Do extensive data mining of borrowers
One of the benefits of this platform is the quantum of data at your disposal. Apart from credit score, you can check risk grade, credit history, existing loans, etc. This kind of data mining can help identify the right borrowers and substantially reduce the risk of P2P lending.
Ensure you have a diversified P2P lending portfolio
Like in any portfolio strategy, even in P2P lending, look to spread your lending portfolio across age groups, investor risk classes, and yields. Don’t get bogged down by the micros. Look at the right median portfolio for your risk appetite.
Strike a balance between interest rate and risk of default
P2P lending is a trade-off. Ideally, avoid the outliers. Either, they are too solid as borrowers or they are too risky. Stick to the centre of the borrower grading so that you can avoid the negative surprises on this platform.