How to minimise risks in crowdlending

Investing in P2P lending has its risks, as do all types of investments all types of investments. But it is possible to minimise these risks.

In crowdlending there are 3 types of risk: default risk, platform risk and originator risk. Let’s get to know first what each of these risks consists of and how to minimise them.

Default risk

This is the main risk, the most common. When you lend your money you run the risk that the borrower will not pay it back or will default or defaults on the terms, time or amount. The company originating the loan (the one that has granted the loan) has mechanisms in place to recover the money, through collection processes. In some cases, late payments can lead to higher interest can lead to higher interest rates, which can lead to higher profits.

How to minimise the risk of non-payment

To minimise risk, it is essential to diversify by investing small amounts in each loan. The platforms offer this facility and it is possible to invest very small minimum amounts ranging from 1 to 50, depending on the platform.

Another way to avoid the risk of default is to invest in repurchase loans. Platforms such as, for example, Mintos, offer loans with this type of collateral. If there is a default, after a certain period of time, the company originating the loan agrees to buy it back, whereupon you would receive your money and the interest generated.

Platform risk

Nobody knows what tomorrow will bring. A crowdlending platform can go bankrupt or declare bankruptcy. It is not a common occurrence, but it can happen. In case it does, each platform has different policies. Some have contracts with third party companies that ensure the management of the loans in such cases. But each platform is different. You can check their policies on their website, if you can’t find them don’t hesitate to ask for more information.

How to minimise platform risk

To minimise this risk, too, we must diversify and not put all our money in a single platform. Divide the money you want to invest in P2P lending among several platforms. I personally started from the very beginning to invest in 3 different platforms: Bondora, Mintos and Estateguru. You can use more different platforms if you are going to invest a lot of money. The more you invest the more you should diversify.

Originator risk

Many platforms are not the originators of the loan, but only intermediaries. The person who needs money applies to an originator. The platform Mintos, for example, is an intermediary. They work with many loan originators.

If one of these loan originators goes bankrupt, in the event that the loan was the loan had a repurchase guarantee, the originator would not be able to honour that guarantee the originator would not be able to honour that guarantee.

How to minimise originator risk

To minimise this risk, again, you must diversify. On platforms such as Mintos, even in the Auto Invest option, you can choose to diversify across loan originators.

Basic recommendations for responsible investing:

  • Don’t invest more money than you are willing to lose to lose. Perhaps this is a bit of an exaggeration. A little risk is fine, but don’t gamble with what you don’t gamble with what you may really need.
  • Don’t invest all your savings. Leave a buffer for unforeseen events that you can access at any time.
  • Diversify your investments. Both the general investment savings, as well as the investment you make in P2P loans, should be diversified

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Carmen Corral

I invest in P2P lending since 2019. This type of investment was the first that I incorporated into my portfolio, due to its simplicity. Here and on the YouTube channel canal de YouTube I talk about my investments and crowdlending news.

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