Why P2P lending is right for savvy investors
The peer-to –peer lending industry, valued globally at $64 billion in 2015, is growing at a compound annual growth rate of approximately 50%. Its credentials have been established as an asset class which delivers predictable returns for investors shielding them from stock market volatility. The emergence of P2P platforms has opened up the consumer credit market which was earlier open to only institutional investors such as banks and Non-banking financial institutions, allowing income-seeking investors to diversify their portfolio with an alternative investment strategy.
Given below are just a few of the reasons why P2P lending is lucrative to potential investors:
· Higher Returns – The returns of around 14% to 30% p.a (a higher APR can be expected due to EMIs) are highly competitive when compared to average returns delivered by other market linked investments such as the stock market and fixed deposits.
· Risk Adjusted Returns – Responsible platforms help lenders earn higher net returns by helping them to mitigate individual risk. Helios P2P has taken steps such as using their proprietary model for debt scoring as well as partnering with a debt collection agency to help their lenders manage inherent risk and earn more.
· Preset Tenures – In the peer-to-peer lending world, borrowers and lenders are able to choose from a predefined set of tenures as per their needs. Helios P2P funds short term to medium term loans with tenure ranging from 1 month up to 18 months.
· Regular Income – Investors can earn month-on-month returns in the form of Equated Monthly Installments (EMIs). This is a major advantage offered by P2P lending compared to other market-linked investments that can have a long term lock-in period.
· Benefit of Compounding Return – Lenders earn returns every month which can then be re-invested to generate compounding returns.
· Diversification of Lending Portfolio – An investor usually invests in multiple financial instruments such as stocks, fixed deposits etc. Investing in P2P lending adds to diversification of the lenders market-linked investment portfolio. Furthermore additional diversification in P2P lending can be attained by investing across borrower profiles – such as Helios P2P’s borrower grades.
How P2P lending works
Peer-to-peer lending allows investors to lend directly to companies or individuals, and participate in large pools of loans, thereby limiting their risks. Helios P2P pre-verifies borrowers before listing them as well as performing KYC checks. Helios P2P uses an automated credit evaluation mechanism based on their proprietary analytics model to screen of buyers and to rate them from minimal risk to very high risk based on their profiles. All information about the borrowers is transparently mentioned on the dashboard and can be used by investors for selecting their prospective borrowers
How investors are gauging risks vs. rewards
Despite stringent due-diligence processes being carried out by P2P platforms, the risks of default cannot be negated. However, by diversifying their portfolio across credit-worthy borrowers, investors can mitigate default risk to a greater extent.
How investments in P2P are expected to grow
Currently P2P lending is not regulated in Sri Lanka but we at Helios P2P incorporate best practices based on similar P2P platforms worldwide to ensure a high quality of service. We also expect this space to be regulated over time and we welcome such regulations which will bring more stability and credibility to the industry boosting lender confidence.