Richard Litchfield is Head of Operations at Lending Works. In this article, he will discuss how aspiring investors can build a diverse and lucrative investment portfolio using peer-to-peer (P2P) lending.
If you’re new to investing, and hope to build a profitable portfolio, then peer-to-peer lending could be just the investment solution that you’re looking for. P2P offers an excellent balance between risk and return, so it’s a great starting point for first-time investors. It also offers much better returns than traditional savings accounts and ISAs, which have seen cash savers lose out over recent years owing to a stagnant Bank of England base rate.
Here, I’ll explain exactly how P2P works and share my insider tips for starting a strong investment strategy, so you can get your portfolio off to the best possible start. Just keep reading to learn more.
What exactly is peer to peer lending?
P2P lending essentially involves an online lending platform connecting willing investors with creditworthy borrowers, removing the need for a bank or building society to act as a middleman. This means that borrowers can access lower interest rates, and investors will see better returns than they would with bonds or savings accounts.
Borrowers are usually consumers, who may be looking for loans for a variety of reasons: for instance, to cover the cost of a car, home renovations, debt consolidation, or a special event like a wedding, to name just a few. The platform will vet borrowers using credit and income checks to establish their creditworthiness, and, once approved, they’ll be paired up with an investor.
Investors can start with as little as £10, and they’ll usually be offered a choice of different loan terms, lasting anywhere from 1–5 years. The longer the term, the higher the interest rates. The loan is then paid out to the borrower, and all that’s left to do is sit back and watch your investment grow as the repayments are made.
Is it a low-risk form of investment?
No competitive investment strategy is ever going to be completely risk-free, but P2P strikes a good balance between being low-risk and offering solid returns. Your money is diversified across a range of different loans, which means that your losses will be cushioned by your other investments if a borrower defaults on their repayments. Many P2P platforms will also have reserve funds and other safety measures in place to help provide a buffer to protect investors.
While it’s true that stocks and shares can offer more lucrative returns, they do come with a higher level of risk, especially for inexperienced investors. It takes skill, expertise, and luck to successfully invest in the stock markets, so if you’re just starting out, it’s best to establish your portfolio with low-risk strategies.
You can then diversify with a few carefully-chosen, higher-risk investments further down the line.
How do I start?
The first step couldn’t be simpler: all you need to do is sign up to a P2P platform, decide on an amount to invest, and choose an investment term.
If you want to see higher returns, then the key thing to remember is that you’ll need to pick the longest possible loan term. With Lending Works, you could earn as much as 6% per annum on a five-year term, but this falls to 4.5% for three-year investments, so always opt for the longest possible term that you can afford.
If you’re serious about maximising your profits, you’ll also need to think carefully about when to withdraw your earnings. You’ll have the option to draw down your repayments, but, unless you plan to spend the money right away, I’d always recommend reinvesting them in further loans. Owing to the rate of inflation, your profits could lose money if left sitting in your bank account, but when your money is invested in loans, it’s actively accruing interest and working for you. So, it’s always better to reinvest. Many platforms will allow you to reinvest automatically, so it couldn’t be simpler.
Now you know the ins and outs of P2P lending, you can begin planning your first investment strategy. Bear these tips in mind, and, before long, you’ll be well on your way to a successful and lucrative portfolio.