I currently have investments in both Mintos and Peerberry. In this article I talk about my strategies to minimize the risks of peer-to-peer lending.
There are 4 types of risk associated with P2P lending;
P2P Platform
The risk with the platform is that the platform becomes insolvent. In this case the loans between you and the borrower are still valid and there is a good chance that you will get your money back, but it may be delayed and it is possible that you will not get it all back. There are 2 ways to reduce this risk. First, choose the most reliable platforms to invest with. I have chosen Mintos, it is the largest P2P platform in Europe and has been consistently growing. The second is to spread your investments across several platforms. I have started to look at other P2P platforms and recently invested €100 in Peerberry. This is a trial for me but if this goes well I will invest some more and then look at other platforms also.
Loan Originator
By investing all of your money in one loan originator you would be taking a huge risk that if something was to happen to that loan originator then all of your investment would be gone. I have reduced this risk by diversifying my investments across many loan originators. Mintos also has a loan originator rating scheme where loan originators are rated from A+ to D-. I have chosen to only invest in loan originators that have a rating of greater than B-. This also helps to reduce the risk as these loan originators are far less likely to have issues. Diversifying your portfolio of loan originators is very easy with the auto invest feature on Mintos as it allows you to automatically diversify.
Borrower
If you invest in a loan and the borrow fails to repay, you can lose your investment. By investing small amounts in multiple loans I am spreading this risk across several loans, I invest only €10 in each loan. The other thing I do is I only invest in loans that have a buyback guarantee. This means that even if the loan defaults, I will get the principle and interest owed to me on that loan when the loan becomes 60 days overdue. For me this is one of the most important steps I take to reduce risk. There are loans with a higher return without buyback guarantees but I consider these too risky.
Liquidity
Once you agree to a loan, the money that you have invested into the loan cannot be touched. To minimize this I invest in short term loans that only last 1-2 months. These have a higher return but are also more risky. However as I have the buyback guarantee I know that I will get my return from these loans in a maximum of 4 months (2 months invested + 60 days buyback guarantee)
Partial Investment
It is possible that some or all of your money can sit in your P2P account and not be invested. This money is making no return. To reduce this I use the auto invest feature in Mintos and Peerberry. They allow you to set up investment strategies where you can set all the filters as you like and your money will be automatically re-invested when it becomes available. This also saves you time as you don't need to manually invest every day. In addition, as I mentioned earlier, you can automatically diversify your investments across different loan originators which helps reduce this risk also.
