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    Here's how you can reduce your risk in peer-to-peer lending

    Here's how you can reduce your risk in peer-to-peer lending

    Here's how you can reduce your risk in peer-to-peer lending
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    By Suman Singh   IST (Updated)

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    Fairly new to the financial system, the Reserve Bank of India (RBI) regulates the P2P platforms to protect the interest of the lenders, as well as, the borrowers.

    Lending money to individuals and firms is a risky business. However, there are ways to mitigate risk. Peer-to-peer (P2P) platforms offer personal loans at really affordable interest rates from a group of individual lenders without going through the hassle of an intermediary, such as banks.
    Fairly new to the financial system, the Reserve Bank of India (RBI) regulates the P2P platforms to protect the interest of the lenders, as well as, the borrowers. In October 2017, the central bank made it mandatory for all P2P companies to apply for a licence to continue as a P2P platform.
    Here are five ways by which an investor on a P2P platform can mitigate the risk ensuring to get the money lent, with interest:
    Know The Platform
    Understand how an online peer-to-peer platform works before starting to lend money on it. An investor should be aware of how the money is being lent on the platform to the borrowers and the risks involved in lending money on the platform.
    Most investors on the P2P platforms are mid-age salaried/self-employed individuals, who lend out money to earn attractive returns by taking higher risks compared to financial assets that include mutual funds, etc. 
    You can do your own research or by contacting a P2P player about the overall volume, defaults, recovery process and likely returns.
    Split Your Money Among Platforms
    It is always better to start investing the entire corpus in smaller amounts and among three-four websites. Diversification is essential among the platforms and within the platforms. An investor should choose a diverse borrower profile which reduces the risk of principal default. Choosing many borrowers across the interest rate spectrum will average out the returns and the risks.
    Choose Your Borrower Smartly
    Since P2P is one of the few avenues where loans are available without much paperwork and hassle that an individual has to go through with a bank or non-banking financial companies (NBFC), it calls for practising caution.
    Make sure you have checked the borrower's financial details like average bank balance, quarterly bank balance, income tax return besides the salary or income. Also, you should clarify regarding the borrower's personal background including educational background, family members and dependants on the borrowers before going ahead with lending your money.
    “Factors like city, gender and employment status can considerably alter the net returns. Among women borrowers, the default is lower by around 50 percent. While male default percentage stands at 3.5, it is around 1.85 percent among females,” Raghavendra Pratap Singh, co-founder, i2ifunding told Economic Times.
    Choose a seasoned P2P platform that has been in the business for some time now as, these lending firms will have most of the required support in place such as legal consultation, customer care, etc.
    Practice Caution
    P2P platforms are mostly run by groups of individuals who give attractive rates on the money that they lent out and the returns are mostly in double-digits.
    However, do not go overboard and lend your entire savings on the platform. Choose the amount you wish to invest and then diversify, Singh said.
    Be Invested
    Try to stay invested on the platform to see the results for an initial period of 3-4 months and then slowly you can increase your exposure. Stay in the lending cycle for at least 1.5 - 2 years and keep reinvesting the principal amount. This will help you compounding on your return and may help you overachieve your return expectations. 
    In turn, you will also gain more knowledge about the process of lending on the P2P platform, which will help you make informed investment strategies in the future.
    "There are broadly two types of risks in P2P lending: intentional and capability risk. A default may occur because of the borrower’s lack of intention or his ability to pay the loan. Investors should know about the recovery process and action taken in case of fraud before they try their hand in this space," ET reported.
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