All about Peer-to-peer lending business and how much you should allocate in terms of your total portfolio ? - Making it simple, getting 1% better everyday. (2024)

I would like to begin with a very famous yet simple quote by Warren Buffet “Risk comes from not knowing what you’re doing”. So in this article we will talk about What are the risk associated with P2P lending and how much you should allocate ?

To start with let’s just first understand what is Peer to peer P2P lending?

Peer to peer lending also known as crowd lending is a part of debt financing where borrowers can borrow money and investor’s can give their surplus money to borrowers without the involvement of traditional entities like banks.

The Match of borrower and an investor is done through an fintech intermediary platform known as P2P lending platform.

Here’s how the process typically works:

1. Borrower Application: Individuals or small businesses in need of a loan apply for it through a P2P lending platform. They provide details about the purpose of the loan, the amount needed, and other relevant information.
2. Credit Assessment: P2P lending platforms usually assess the creditworthiness of the borrowers using various criteria, such as credit scores, financial history, and sometimes even non-traditional data.
3. Listing: Approved loan applications are listed on the P2P platform, and potential lenders can review the borrower profiles and loan details.
4. Investor Participation: Individuals or investors interested in earning returns by lending money can choose specific loans to fund. They can typically diversify their investment by lending small amounts to multiple borrowers.
5. Loan Funding: Once enough investors commit to funding a loan, the borrower receives the total loan amount. In some cases, a single investor may fully fund a loan, while in others, it may be funded by a group of investors.
6. Repayment: Borrowers repay the loan over time with interest. P2P lending platforms usually handle the repayment process and distribute the funds back to the lenders.

P2P lending offers benefits to both borrowers and lenders. Borrowers may find it easier to access funds compared to traditional banks, especially if they have difficulty obtaining loans through conventional channels. On the other hand, lenders can potentially earn higher returns than traditional savings or investment vehicles.

Also there are some of the risk associated with P2P lending platforms let’s talk about risk involved P2P businesses

1. Default Risk: If a borrower is unable to repay the loan, investors may lose part or all of their investment. Unlike traditional banks, P2P platforms may not provide the same level of risk mitigation or guarantees.
2. Liquidity Risk: P2P loans are usually not as liquid as stocks or bonds. Once you’ve invested in a loan, it can be challenging to sell your position before the loan matures. Investors should be prepared for the possibility of tying up their funds for the duration of the loan term.
3. Tax Implications: The tax treatment of P2P lending returns can vary, and it’s essential to understand the tax implications in your jurisdiction. Interest income from P2P lending may be taxable, and investors should report their earnings accurately to tax authorities.
4. Evolution of the Industry: The P2P lending industry is dynamic and subject to changes. New regulations, technological advancements, or shifts in investor behavior can impact the landscape. Staying informed about industry trends and updates is crucial for making informed investment decisions.

So P2P lending platform looks a little interesting concept but let’s now talk on the important thing on how much should you should allocate everyone has a different opinion and take on this and there is no fixed rule but in my view the investment amount in P2P lending should not exceed 5% of your entire portfolio.

Also there are certain things that care of before investing in P2P business and the point number

—Geetansh Malik

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