If you’re considering giving personal loans online, as a form of investment, there are many sites dedicated to peer to peer lending that can help you out. The very first question you have to ask yourself is how much you can afford to lose. No matter how tight the contracts may be, the market situation changes quickly, and, as with any form of investment, there is a chance that you may lose the money – so don’t put in more than you can afford.
Think Like a Bank
When using peer to peer lending sites, you can either allow the respective company to administer your portfolio entirely, or you can interview the bad credit loan applicants yourself, and decide on a case by case basis. If you’re just starting out and you’re not entirely sure how things work, it is perhaps better to let the company make the decisions for you, since they already have the experience and some criteria in place to evaluate borrowers.
The system allows you to get considerable returns on investment, on average of 9-10%, so the profits are greater than what you can expect from mostly anything else available on the market today, but the risks are also considerable. Start with a conservative portfolio, and expand later, if you feel this is the right direction for you.
You will probably want to ask the applicants the same questions that a bank would normally ask: their credit score, their current income and income to debt ratio, and so on. Remember that most people use peer to peer lending because they cannot qualify for a loan from a traditional lender, so don’t expect to see spotless credit history.
Don’t Be Afraid to Say No
You take considerable risks with your money, so you naturally want to make a profit, not to provide charity or a public service. You will probably hear a lot of heartbreaking stories, and you will meet a lot of people in desperate need for financing, but you have to learn how to limit the risks. In other words, you have to learn to simply say no, when you feel the investment would be a wrong choice for you.
If things go wrong, and you have to recover your money via a court of law, you will be asked to prove that the borrower had a sound financial situation at the time when the agreement was signed, and you had reasonable ground to believe that he or she would be able to repay the loan on time. If you cannot prove that, the chances of ever getting your money back are slim, so weigh your options carefully.
The biggest issue with peer to peer lending is balancing privacy options with the right to access information about the borrower. For example, in some cases it may be important to find out why the applicant wants a loan – it’s not the same if they need it to pay for a vacation at a luxury resort or for a home remodeling job. On the other hand, the peer to peer lending companies have consultants and procedures in place, so you can always ask for help if you’re not sure what to do.
I've heard this is a great way to earn some additional investment income. The idea is risky for most people though; you have to make sure you have enough cushion to face a potential loss.