4thWay’s 10 P2P Investing Principles

Peer-to-peer lending is on average a relatively low-risk investment compared to the stock market and it is relatively easy to assess compared to picking shares – provided you arm yourself with knowledge.

But it's still, most definitely, an investment, meaning carelessness, greed, panic, pride, fear and ignorance can get the better of us.

With that in mind, here are 4thWay's 10 P2P Investing Principles to choose which P2P lending platforms to lend through.

These following Principles help guide you, and keep you on sensible and sure footing. They help you to sleep better when the economy is sinking and bad debts are rising. They're also very solid rules to easily weed out most of the worst opportunities and to substantially lower the risks.

4thWay has tested these principles since 2014 and they continue to be extremely effective. We've seen no reason to change them. We believe that all lenders following all ten of these rules will easily have made a profit.

4thWay's 10 P2P Investing Principles

Principle One. If you have any doubt at all about lending through a specific P2P lending account, the answer's “No”. Only lend when you're supremely confident you understand all the risks.
Principle Two. Only lend when you're getting a decent premium over savings accounts and cash ISAs.
Principle Three. Treat buried information as if there's a reason, missing or ambiguous information as if it contains bad news, and decreased information as if it contains worse news. Demand more verifiable information the less that is provided freely.
Principle Four. Spread your money across lots of loans and P2P lending sites, and across other investments too – not just P2P.
Principle Five. If something smells fishy it just well might be. Trust your warning instincts, those little alarms and feelings in your belly. Don't let beguiling interest rates confuse your nose; sniff around for more pleasant smells.
Principle Six. Try your hardest not to prove you're right to invest but to prove yourself wrong. Look hard and deliberately for the weaknesses in the case. Only that way can you truly get wise and make confident decisions.
Principle Seven. Set your own simple lines in the sand in terms of the level of risk you're willing to take. (For example, not lending in property loans where the loan amount is more than 70% of the property valuation.) Only change these when there's an extraordinarily good case backed by all the facts and indicators. Don't move the lines in the sand just because the crowd (including journalists, pundits and experts) say that you should, or because nothing has gone wrong for a very long time. With investments, it's always when the last cynic thinks it's safe – and moves their lines in the sand – that it goes all wrong for them!
Principle Eight. Return of capital (the money you lend) is more important than return on capital (the interest and profits you earn when lending). The most important thing you should look for is high confidence that you'll get all your money back.
Principle Nine. Don't borrow to lend. The risks are too high. There might be exceptions to this principle, but they will be truly rare and unusual.
Principle Ten. Past profits do not mean that future profits are inevitable. Seemingly profitable investments can swiftly turn into bad ones for the unwary, the non-sceptical, the ill-informed and the greedy. Keep re-assessing the risks. Think independently.

This was the third guide in a series of P2P guides

Read our second guideIs Peer-to-Peer Lending Safe For Lenders?

Read our fourth guide: The 12 Key Peer-To-Peer Lending Risks.

See all the guide pages.

Independent opinion: 4thWay will help you to identify your options and narrow down your choices, but the decision is yours. We're responsible for the accuracy and quality of the information we provide, but not for any decision you make based on it. The material is for general information and education purposes only.

We are not financial, legal or tax advisors, which means that we don't offer advice or recommendations based on your circumstances and goals.

The opinions expressed are those of the author(s) and not held by 4thWay. 4thWay is not regulated by ESMA or any of the domestic financial regulators in Europe. All the specialists and researchers who conduct research and write articles for 4thWay are subject to 4thWay's Editorial Code of Practice. For more, please see 4thWay's terms and conditions.

This page was adapted from our UK website. The original is here.

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