When to (not) lend to peers?

I’ve covered the basics of Peer to Peer Lending in a previous post, and we’ve also covered my first results. Now it’s time to create some imaginary filters for when to lend your money to others.

How much money should I lend to peers?

As a rule of thumb, many sources tell us that we should at most lend out 10% of our savings. We also know that we should spread out our investments as much as possible, to reduce risks. After all, if you have $1000 to invest and you invest it into one project which will earn you a 10% interest rate. You expect to get $1100 out of it. However, if it fails, you will lose all your money and end up with $0. If you spread out this $1000 into 40 investments of $25 which all yield a 10% interest rate, you still expect to get $1100 out of it ($27,50 each). If one of them fails, you will end up with $1072,50. Which is a whopping $1072,50 more than $0, ha!

Therefore, you should try to split up your investments as much as possible. Never put more than 1% of your investments into one project. Now, this is easy for large investments. Say you’ve got $1.000.000 in savings. The above rules state that you should invest $100.000 at most and then split it into 1% investments, which is $1000 per investment. However, most of us don’t have as much money, which just means you have to be more aware of the risks.

Say you’ve got $5000 in savings and you want to start investing and build a passive income. You’ve subscribed to a platform where the minimum investment is $100 and that’s all the options you have for now. The rules state that you should only invest a maximum of 10% of your savings (which is $500) and split that into 1% investments ($5 each). The minimum on this example platform that you’re using is $100 so you won’t be able to do that. Surely go ahead and invest 5x $100 on the platform. But be aware of the higher risk of your investments! If one of the projects fail, that means you will not lose 1% ($5) but 20% ($100). This can put a real dent into your investing strategy.

Which peers should I invest in?

Depending on the platform that you use (see some examples in this blog post) you have different information about the people or projects asking for a loan. Always follow your mind, not your heart, when making financial decisions. If someone has a very cool motorcycle they want to buy for $10.000 and they need a loan for that, but you see that their paycheck and fixed expenses result to $0, then you should determine that he or she has no money to repay the loan (or maybe even pay the interest!). Leave this loan request to others who are willing to take huge risks.

Here are some key stats to focus on for individuals asking for a loan:

  1. Monthly income;
  2. Monthly (fixed) expenses;
  3. Other outstanding loans;
  4. Financial history;
    1. Previous loans;
    2. Recent job changes;
  5. Financial situation;
    1. Partner;
    2. Roommate;
    3. Rent or mortgage;

That’s the key factors that I look into when deciding whether or not to invest my money in someone. Do you agree on this? Are there any aspects that I forgot? Leave a comment with your thoughts, let’s help each other!

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