Every day we make mistakes. Because of uncertainty, investments are no different. It is important to avoid common investment mistakes. Although peer to peer lending is the newest and fastest-growing investment platform in India, it does come with its risks. There is huge potential for lenders to make higher returns on their money than equity, given the large pool of borrowers who are looking for short-term and long-term loans. Before you invest your hard-earned money, it is important to be aware of the following common mistakes made in Peer to Peer lending:
- You shouldn’t invest without doing your research. Not all investment platforms have a transparent process. It is important to do thorough research before you make any investments. Sometimes new investors lack product knowledge, which can lead to poor investment decisions. One of the most common mistakes investors make is not reading the charges and policies associated with the products. This can lead to a lower return. You can make smart investments by doing thorough research on the platform, the products available, and the many risks involved.
- Diversification is a problem – You can’t have all your eggs in one basket. The same principle applies to financial investments. Diversification is key to reducing risks and improving returns. Let’s take Investor A, for example. He puts all his money into a loan that has high returns but is not identified as a risk. Investor B, on the other side, puts money into three loans with different risks. Investor A would lose all his money if the borrower with unidentified risks is unable to repay the loan, while Investor B would get returns on the two other loans. There are many risks involved in P2P lending. Borrowers and products can have different risks. It is important to keep a portfolio that you invest in. This will ensure that defaults are minimized over the long-term.
- Understanding the risks of borrowers’ profiles – Diversification is important when investing. However, lending money to borrowers with lower credit scores could lead to financial disaster. You should thoroughly review the information of all borrowers to reduce risk. A borrower who has a high monthly income might seem attractive to you. However, this is not the only criteria. He/she may have an ongoing loan that could affect the repayment. CIBIL score is a key indicator of credibility. Don’t miss it.
- Aggressive approach – This is a common rookie mistake made by investors. You might consider high-risk investments if you’re just starting out. As a new investor, there’s more risk involved. If you don’t manage it well, it could backfire. It is important to take your time and learn the basics of a new financial product before you invest in it. The same applies to P2P lending. Always start small with different products, and then you can begin to understand how it works. It is a mistake to believe that all products can be good investments.
- You are looking for quick returns? Patience is your greatest asset. If you want to see returns as soon as possible, peer-to-peer lending is not the right choice. New investors sometimes see high returns and decide to invest in peer-to-peer lending. However, they quickly realize that it takes time for the promised returns. This works in the same way that banks lend money. There is also the possibility of late repayments, which can’t be ignored. P2P lending allows you to reinvest the money from returns. This helps you to successfully implement a long-term approach. Be patient and enjoy higher returns while taking on moderate risks.
While investing mistakes can’t be undone, it is important to avoid them and learn from them. This will help you build a portfolio that has better returns and lower volatility over the long-term. We hope that this article will be helpful to lenders who are interested in exploring the P2P lending marketplace.
