Understanding P2P Lending
Let’s first look at the traditional lending model to better understand microlending.
In the traditional lending model, you typically go to a bank to apply for a loan. The bank evaluates the borrower’s credit score and, if approved, provides the funds. The bank funds the loan with the capital it receives from the central bank or customer deposits. However, obtaining loans from traditional banks is not always easy, which has led to the emergence of non-banking lending companies or loan originators that own a lending license.
Non-banking lending companies have their own processes for providing loans that allow borrowers to access the funds they need immediately. Many companies do not have access to bank loans, which is where microlending comes in. Microlending allows individuals to borrow money directly from other individuals without the involvement of a bank, also known as social lending or crowd lending.
Points to remember:
- Microlending is a form of financial technology that lets individuals borrow money from each other without any bank involvement.
- Microlenders are investors who want better returns on their cash investments. These returns are better than what they would get through a traditional investment account.
- Microlending borrowers are looking for alternatives to secure capital because they don’t have access to banking systems in their community.
- Default rates for Microloans average about 3-4% for the loan originator.
What is Microlending?
Microlending is a form of peer-to-peer lending that allows people to borrow money from each other without the involvement of a bank. The latest financial technology allows borrowers to access the funds they need quickly, and it also gives investors the opportunity to earn higher yields. At Positiviti Lending, it starts at 12% annually.
A group of investors invests in a microlending platform, which can then lend that money to borrowers. For personal loans, borrowers pay back the loan with additional interest, and the investors will receive the principal and interest on a monthly basis. When using microlending platforms, investors fund loans to borrowers. These platforms assess the borrower’s information, such as age, gender, and country, and run a credit check to ensure their ability to repay the loan. If a borrower is unable to repay their loan, the lending company is responsible for debt collection.
Overall, microlending is a convenient and attractive option for both borrowers and investors. It allows borrowers to quickly access the funds they need immediately while also giving investors the opportunity to earn high yields on their investments. Default rates for microloans are typically around 3-4% for the loan originator. For Positiviti Lending, default rates are less than 1%.
Microlending for Investors
How to Invest in P2P Lending
Investing in microlending, also known as peer-to-peer (P2P) lending, is simple and can be done from the comfort of your own home. To get started, you will need to get registered on a trusted microlending platform such as Positiviti Lending. You will then need to verify your identity and transfer your funds into your investment account. To be eligible to participate in microlending platforms, you must be at least 18 years old and have a bank account in your name.
Once you have registered and transferred your funds, you can use the platform’s investment strategy to invest in loans. The interest on your investment can either be paid to you monthly or at the end of the loan term, depending on the type of loan you are funding.
One of the main benefits of microlending is the low minimum investment amounts and minimal time and commitment required to start earning returns. At Positiviti Lending, for example, you are required to invest for a term of 13 months. After this, you can request your principal and interest earned to be paid or you can choose to roll over the total amount into a new cycle of lending. At Positiviti Lending, it is possible to earn yields starting at 12% and up to 36% annually.
Is Microlending Safe?
Microlending can be a safe investment option if you take the time to do your due diligence and invest in loans with a low risk of default. For experienced investors, it may not be difficult to select the best platforms and loans, but if you are new to microlending, it is important to research platforms and educate yourself about the various risks involved.
It’s worth noting that microlending is not completely risk-free, but the more you know about the potential risks, the better equipped you will be to mitigate them. As with any investment, there is always some level of risk involved. Therefore, it is a good idea to understand the different risk types that may impact your investment. There are four major risk categories that you should be aware of before investing in microlending:
Just like any other financial service provider, microlending platforms can experience technical issues. To reduce this risk, it is recommended to invest in loans from well-established platforms with a good track record.
Loan Originator Risk
The loan originator is the company that borrows money from investors. Loan originators can be subject to business risks, such as financial difficulties, fraud, or defaulting on their obligations. To reduce this risk, it is recommended to invest in loans from companies with good credit ratings, good performance, and a solid financial track record. It is also recommended to be cautious about investing in start-ups, as they may be riskier.
The borrower is the individual who takes a loan from the loan originator. Borrowers may default on their obligations for various reasons, such as losing their main source of income, experiencing financial difficulties, or simply choosing not to repay their loans. To mitigate this risk, it is recommended to invest in loans with low loan-to-value and to take note of buyback guarantees offered by the loan originator. A buyback guarantee is an obligation from the loan originator to repurchase the investment if a borrower defaults on their payments.
This is the risk associated with changes in the economic environment of the market in which you fund your loans. This can include regulatory changes, such as interest rate caps or fluctuations in the value of the local currency, which can affect the repayment of the loan due to unfavorable exchange rates. Investors should monitor these market risks, particularly if they are cautious. Many investors like to avoid investing in countries with volatile currencies.
By understanding these risks and taking steps to mitigate them, you can increase the safety of your microlending investments.
Types of Microlending
There are different types of microlending available on P2P lending platforms, and some offer more protection for lenders than others.
One type of microlending is business lending, also known as crowdfunding. These platforms allow investors to participate in business loans, which are typically secured by business assets such as accounts receivable, inventory, commercial pledges, or real estate. Investing in business loans is a common strategy for experienced investors who want secured loans, but it can be complicated and requires evaluating the offered collateral. We recommend choosing reliable peer-to-business platforms so you can avoid loss.
Microlending for Personal Loans
Another type of microlending is for personal or consumer loans, which is the most common type in the microlending industry. These loans can be funded through platforms that invest in a dedicated loan originator’s loan book or in a provider in a specific market.
Developing a lending strategy can help you manage the level of risk you are willing to take. Investors should conduct thorough research on individual markets and the lending practices and regulations followed by the lender when considering microlending as an investment option. It is important to be aware that microlending platforms will use your funds to generate returns, and in order to offer more attractive returns, they may take on higher levels of risk. It is crucial to understand the differences between various platforms in order to optimize your strategy to fit your risk profile.
You can define your strategy based on the following questions:
- Return: How much interest are you expecting to earn?
- Protection: How will your investment be secured?
- Liquidity: How quickly will you need access to your funds?
- Automation: How much time do you want to spend on your investments?
- Support and Transparency: Are you working with an established company where you feel comfortable and confident?
The goal of investing in microloans is to generate passive income. When evaluating microlending platforms, consider factors such as expected return, protection for your investment, liquidity, automation options, support, and transparency. Keep in mind that the return on your investment will generally be proportional to the level of risk you are taking. It is also important to consider the level of support and transparency offered by a platform, especially if you are new to microlending.
When investing your funds into a P2P platform, it is crucial to do as much research as possible before committing yourself. Make sure to check reviews and understand the risks involved before investing. With this understanding of P2P lending, start exploring different platforms and investment opportunities. P2P lending is a great way to create passive income. We hope our guide helps as you get started on your P2P lending journey!
This guide is intended to provide a helpful starting point as you embark on your microlending journey with Positiviti Lending.
Positiviti Lending, Microlending that makes a difference!