Risk Mitigation in Lending and Borrowing Money
It’s a common notion that when it comes to borrowing or lending money, non-payment of credit and defaulting are the only risks that lenders may face. But this notion is far from the truth. The fact of the matter is that many lenders tend to miss the opportunity of tapping a potential borrower. And this is because many microlending websites lack the data necessary to make an informed decision.
At the same time, it’s also true that microlending is an old concept and primarily focuses on the people at the lower rungs of the economic ladder. The key concern here is to minimize risks involved with microlending to facilitate affordable financial assistance for everyone.
This is where both the involved parties (lenders and borrowers) need to use legit financial tools such as a lending and borrowing money app. Doing so will help them minimize the risks involved in microlending.
Is that all that can be done to minimize the risks of lending and borrowing money? No! There are many other ways to do so.
Risk: Lenders Don’t Know Borrowers
While the internet has made the world a virtually local place, it’s impractical to believe we can know everything about everyone. While banks are apprehensive about giving loans to people with bad credit scores, lenders also face the same dilemma. The main reason behind this apprehension is the fact that lenders have never actually met the borrowers, and they know nothing about them.
The Solution: Get Acquainted With Your Borrowers
Credit history, or the lack of credit history to be precise, is the leading cause behind lenders not trusting the borrowers. Lenders need assurance that the borrowers adhere to the terms of the loan agreement and pay on time. On top of that, lenders also want to ensure they are lending money to the right people. For this, there has to be a thorough profile of the borrower. This is where the importance of customer data comes into the picture.
Add the advent of technology to the above scenario, and you’ll get state-of-the-art solutions like Artificial Intelligence (AI) and the Internet of Things (IoT) at your disposal. These technologies play a crucial role in getting a substantial amount of data for your potential borrowers, even those whose credit score is virtually non-existent. The benefits of these technologies also work in the favor of the customers, but it all comes at the cost of data privacy. Which happens to be another risk. And there’s a solution to that too!
Risk: Data Security & Privacy Breach
Everyone is particular about the security and privacy of their data. The more data a customer provides to the lender, the more concerned they are regarding its security and privacy. Since microlending happens with the help of an app for borrowing money, borrowers are always worried about the security of their data. They may also worry about the confidentiality of their data.
The Solution: Using Secure Platforms and Applications
Creating a secure and trustworthy app for borrowing money is the key. The app creators must ensure they follow all the web security protocols so the borrowers’ personal information is safe from unauthorized access. An app for lending money must prompt users to create a secure password.
From the end-user perspective, especially the borrowers, choosing a secure platform or money lending app is imperative. While there is no risk of losing money, they must safeguard their personal information.
When we talk about risk mitigation, the investors are at higher risk as compared to borrowers. The primary reason is that the borrowers are worried primarily about their data. And we know creating a secure platform is enough to avert that risk.
But, lenders have their money at stake here, so, it’s vital for us to talk about risk minimization for them.
Get Familiar with the Platform
Understanding how online peer-to-peer works is crucial before venturing into this business model. Investors should understand how a particular Peer-to-Peer microlending platform works. Some of the right questions that the investors should ask the P2P platform owner are:
- What’s the process of money lending?
- What is the volume of loans?
- What’s the default percentage?
- What is the average return on investment?
- What all risks are involved?
In an unlikely event when things go south, you must be able to reach out to the platform support via phone, email, and chat.
P2P money lending platforms indeed offer high returns. However, experts suggest you should refrain from lending all your savings on one platform. The key lies in diversifying your portfolio, which brings us to our next point.
Start Small and Split
Starting with small amounts is the right way to start lending on a P2P platform. On top of that, dividing the corpus among multiple P2P platforms and investment options will be a good start.
According to P2P lending experts, new investors should diversify their investments on four to five platforms.
Even on a particular platform, investors should try to diversify their corpus among various borrowers. Doing so will help them minimize risk and get a better return on investment.
Evaluate Your Borrowers Thoroughly
Understanding the borrower profile thoroughly is vital for every investor. Investors should observe the following financial details of each borrower:
- Average bank balance
- Quarterly bank balance
- Income tax
But the story doesn’t end here, for there are other factors that also help investors in making an informed decision. These factors include the number of dependants in the family, educational background, etc.
Investors should start investing in P2P lending on well-established platforms. Experienced platforms are known to offer collection, customer service, and legal support. This way, you won’t need to worry about what to do if things go haywire.
Do Not Hurry
To get the expected return on your investment, P2P microlending experts recommend staying invested for 1.5 to 2 years. This will help investors benefit from the compounding interest. The first 3-4 months are important to understand how a particular platform or investment is panning out for you. As you gain more knowledge, you can plan to increase your investments gradually.
Primarily, there are two kinds of risks involved in peer-to-peer lending:
- Intentional Risk: When a borrower doesn’t intend to pay the loan.
- Capability Risk: When a borrower is incapable of paying the loan.
In either case, there’s a chance of you losing your investment. So, get familiar with the recovery process to know the right time to take action if/when fraud occurs.
The Lendee Advantage
Lendee is the most trusted app for lending money where investors can choose to invest in numerous options. Built to keep things streamlined, Lendee is one platform where you get to enjoy a high return on investment with minimum risk.
Investors can easily create their accounts on Lendee and start investing. With Lendee, you’ll get instant access to a huge network of borrowers and a plethora of investment opportunities. Once you accept a money lending offer, Lendee will take care of the rest. The team working behind this lending and borrowing money app will handle all of your payments, collections, and monitoring. The best part is that this all will happen well within the Lendee app itself!
Lendee gives you complete control to set your own terms and fees, all you need to do is count down the days to your next payout. Or, you can simply choose to reinvest and earn more!