5paisa Loans Blog

5 ways to identify whom to lend

By Anurag Srivastva | 14 Mar 2020

If you have identified peer to peer lending as a preferred choice of allocating money, there is some basic homework required. You are giving an unsecured personal loan. Moreover, you are giving the personal loan on an impersonal and agnostic platform. The big question is; how to identify whom to lend to?

Look at your risk and return requirements

This should be your starting point. Don’t take risk that you cannot afford to take in the quest for returns that are just not meant for you. Firstly, Peer-to-peer lending should be a very small portion of your overall investment portfolio. You can just use this platform to add some flair to returns. Secondly, the returns you expect must be commensurate with the risk you can afford to take. That is a key step to identify whom to lend on this platform.

Start small and start short end

Start in small portions and spread your risk. If you are starting off with Rs.50,000; don’t give the entire corpus to a single borrower. Once you know your returns; know your risk appetite. Accordingly, spread across a portfolio of borrowers who match your aggregate risk capacity. Apart from starting small, start with short tenure loans of 3-6 months. You can expand commitment after you test waters and also test clients.

Do extensive data mining of borrowers

One of the benefits of the this platform is the quantum of data at your disposal. Apart from credit score, you can check risk grade, credit history, existing loans etc. This kind of data mining can help identify the right borrowers and substantially reduce risk of P2P lending.

Ensure you have a diversified P2P lending portfolio

Like in any portfolio strategy, even in P2P lending, look to spread your lending portfolio across age groups, investor risk classes and yields. Don’t get bogged down by the micros. Look at the right median portfolio for your risk appetite.

Strike a balance between interest rate and risk of default

P2P lending is a trade off. Ideally, avoid the outliers. Either, they are too solid as borrowers or they are too risky. Stick to the centre of the borrower grading so that you can avoid the negative surprises on this platform.