How To Choose A Peer To Peer Investing Platform?

By
Rafael Vieira (CreativeCompany.com)
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Choose the right investment

Not all p2p lenders are created the same. Each p2p lender has a different profile; investors need to find the right match between a p2p lender and their financial needs. How do investors select the right p2p lenders? This is a question I cannot answer for you, but I can help you in structuring the selection process.

My proposal for selecting a p2p lender is simple but requires work. This work is called financial education. Investors can pick a “recommended” choice from somewhere, but when doing this, they are delegating their work to others, but not the responsibility.

How much time do investors spend when choosing a new car a baby chair or their next vacation destination? Diligent investors spend (at least) the same time when selecting their next p2p investment. Thier older self will be grateful.

Learn more: What is peer to peer lending?  and Beginners guide to p2p lending. 

This is an example of how I would choose my p2p lender, provided as an example for informational purposes only.

How to perform due diligence on a p2p lender

  1. Set initial selection criteria
  2. Investigate / Research p2p lenders
  3. Short-list the winners according to the selection criteria.
  1. Perform steps 1,2,3 above for three times. Each time researching the shortlisted p2p platforms in more detail.
  2. Make your final choice/s.

If you are new to p2p lending, this process can take a while but it will contribute to your understanding of the p2p universe. I like the idea of three rounds as the first round can be done quite fast. The next two rounds allow for a more detailed look at the shortlisted investment choices. The devil is in the detail, with each round an investor can gain important insights.

Selection criteria: (Round 1)

The idea here is to find those investment choices which have potential. Some will be immediately incompatible with an investor’s financial requirements. For example, if an investor is based in Europe, a p2p lender in Asia might not be the best match.

p2p lender profile Investor
  • Basic Company info such as age.
  • Most likely, the longer it has been around, the better it has been serving the market needs.
  • Knowledge on investing and p2p investing?
  • Level of risk accepted.
  • Risk Mitigation Strategies used by p2p lenders such as: Asset Backed loans, Provision Fund, Buy Back Guarantee
  • Default Rates
  • Default Recovery Rates
  • Deal Flow
  • Risk profile of investor
  • Amount invested in other p2p platforms.
  • Amount to be invested
  • Amount of investments in the same market (credit market, asset types, geographic locations)
  • Currencies available
  • Investment objective and currency needed for that objective.
  • IFSA, IFA approval
  • Investor requirements
  • Current Economic Climate
  • Investment timeline

This table can help potential p2p investors to match their financial attributes with those of the p2p lenders. This process can produce a shortlist of around six lenders.

Selection criteria: (Round 2)

p2p lender profile Investor
  • User friendliness of website such as FAQ and Knowledgebase
  • Ease of use of website for investor
  • Minimum Interest Rate
  • Average Loan Term
  • Comparison with other shortlisted p2p platforms
  • Risk
  • Level of Provision Fund
  • Loan to Value Rates
  • Strength of buy back guarantee
  • Source of loans
  • Type of loans
  • Risk profile of investor
  • Minimum Investment per loan
  • The level of diversification in geography, loan type and borrower type on the platform.
  • p2p lending marketplace or a direct loan originator
  • Amount of money to be invested
  • Risk profile of investor
  • Auto Invest
  • Manual Investing / Fast Finger Race
  • Time available for investor

Selection criteria: (Round 3)

p2p lender profile Investor
  • Cashback / Promo
  • Does the investor fit the criteria to be eligible.
  •  Management Team, Experience
  •  Investor
  • Membership in professional organisations
  • Regulated by the FCA or FCSA or equivalent?
  • Reputation requirements
  • Response time in transfers in and out
  •  Investor needs
  • Tax Reporting Requirements
  • Automatic Tax Deductions
  • Time available for an investor to manage tax issues.
  • Legal Jurisdiction of company
  • Access to that jurisdiction, familiarity with the language of that jurisdiction.
  • Documents in small print
  • Length of Terms and Conditions
  • Time available for an investor to read and understand.
  • p2p lender attitude.
  • How does the p2p lender deal with “grey areas”                                                                                               .
  • Investor’s learning curve on p2p lenders.
  • KYC/AML requirements
  • Importance investor puts on the risk his good money is possibly mixed with “other money.”
  • External Interviews and Reviews
  • “Internet” Sentiment about the company
  • If in stage 3 your selection includes a p2p lender with a bad reputation, it would be best if you go back to step 1.

In detail: Monitoring your peer to peer lending portfolio. 

The devil is in the detail. P2p lenders have a fiduciary responsibility first and foremost towards their shareholders. They have an active interest to portray the good about their products and to just inform investors about the risks to what is legally required. In order to offer long term dividends and capital growth to their shareholders, p2p companies need to also have the long term best interest of investors and borrowers.

When joining a p2p lender, investors are supposed to read 100s of pages or terms and conditions. My guess is few do. Investing in stocks is probably similar, not many investors read the annual reports three years back.

After completing this process, check the recommend choices. If they differ from your choice investigate why.

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