Getting Started with Peer-to-Peer Lending

Peer-to-Peer lending is an amazing way to make your money work hard for you, by lending money to others in exchange of interests. However, if you want to get started in Peer-to-Peer lending, many questions can come to your mind. What can I expect exactly from it? How to actually start investing? Will I need to manage my investments every day? I wrote this article to answer those questions and help you get started in Peer-to-Peer lending.

We are first going to see how to integrate P2P lending into your financial goals. Then, we’ll see how to actually get started and start investing. Finally, we’ll see how to put your investments on autopilot to create a completely passive income stream. Let’s start!

1 – Set Your Goals

The first step, as with any financial decision, is to set your goals. I usually set three goals or objectives for any investment that I make: how much I will commit to it every month, what is my monthly income goal for this investment, and what will be the place of this investment in a global investment portfolio.

The first thing to define is how much you will commit to the investment every month. Indeed, after a possible initial investment, you will need to inject fresh money into the investment every month to make it significant. I usually allocate a percentage of my monthly income to invest it into peer-to-peer lending.

Then, you need to define how much you want your investment to generate every month. This is of course something you want to be able to reach, and that you will redefine in case it is reached, for example yearly. A good rule of thumb is to know that most P2P lending platform will give you an average return of 10% annually, so for example if you want to make 100 Euros a month, you will need to have around 12.000 Euros invested in Peer-to-Peer lending.

Finally, you need to define the allocation of P2P lending in your investment portfolio. Even if this website is dedicated to Peer-to-Peer lending, I don’t recommend putting all your eggs in the P2P lending basket. For example, Peer-to-Peer lending currently represents around 10% of my total portfolio.

2 – Select a Peer-to-Peer Lending Platform

Next, you will need to select your first Peer-to-Peer lending platform. This is something I will have a hard time to recommend for everyone, as current regulations make some platforms only accessible by the residents of the country where those platforms are located. This is for example the case for Prosper and Lending Club in the US.

As a general advice, choose a platform that you’ve heard of before not only on the web, but also in the financial press. It’s for example really hard to miss articles about Lending Club in the press. You can also look if they are present at well-known conferences like LendIt. This won’t guarantee that the platform will be here in the future, but it is a really good indicator of the seriousness of the platform.

Also choose a platform with an important volume of available loans. Indeed, you will need to invest in as many loans as possible to protect your investment in P2P lending, so it’s important that you have many loans to choose from. A platform with only a few dozens of loans available would be quite suspicious anyway.

As an European investor, I can recommend platforms like Mintos or Bondora, which are the platforms where most of my Peer-to-Peer lending assets are located.

3 – Invest in Your First Loan

After you’ve chosen the platform where you will invest on, the next step is to actually invest in your first loan! You will of course first need to transfer some money on this platform. A lot of platforms propose fast bank transfers to do that (ACH in the US or SEPA in Europe) so usually the money will be available for investment in less than 2 days.

Then, once the money is available you can actually invest in a first loan. This article is not about strategies to invest in Peer-to-Peer lending, but the goal here is just to get familiar with the different filters that those platforms offer. I recommend playing with those filters to see which type of loans are available.

Then, simply make your first investment to get yourself started in Peer-to-Peer lending. Remember that as a new investor, you should always invest the minimal possible amount (usually around 10 Euros) in a given loan, in order to diversify your investment & reduce your exposure to risk.

4 – Go on Autopilot

Now that you have a foot in the game, it’s time to move up in another gear and automate the whole process. Indeed, at some point you will have payments coming back to your account every day, and you don’t want to constantly be re-investing your gains & choosing new loans.

Therefore, you really need to use the auto-investing functions that most of the platforms offer. They are usually called ‘Autoinvest’ or ‘Portfolio manager’ depending on the platforms. Some of those functions are quite opaque, but most of them will allow you to set your own filters, and then the platform will simply invest in any loan that matches your criteria.

This is why it is so important to understand what every filter mean first: otherwise, you wouldn’t know how to configure the automated investing function of the platform you are using. Also remember that when you start, always set your automated investing function to invest the minimum amount possible on every loan. Once your automation functions are all set, you can know start enjoying a completely passive income stream from Peer-to-Peer lending!

5 – Monitor Your Progress

The last step won’t give you a direct return on your money, but is nevertheless critical: you need to monitor the performances of your investments. This is important because it will tell you if you strategy is working or not. If you have a low return on your investment because a lot of the loans you invested in defaulted, you have a problem, and only a careful tracking will show you why.

I usually monitor my P2P lending accounts once a month. The platform will usually tell you your current annual return on investment. Careful, these numbers are usually only an estimate, and you will need to use more accurate methods if you want to know your real return on investment. But to get started, the numbers given by the platforms are good enough.

If you see that your returns are lower than what the platforms advertises, it’s time to go back to the previous stage and adjust your strategy. Monitoring your progress will also tell you if you reached some of your goals, and if it is time to set new goals to get to the next level.

What’s Next?

Now that you have your first P2P lending investments up & running, it’s time to just repeat the process again & again to grow your investments. Diversify among many loans when you add fresh cash to a platform, but also diversify in several platforms & even currencies. Soon enough, you will have a solid passive income generating portfolio that will grow over time!

Have you already invested in Peer-to-Peer lending? Please share below!