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Critical Checklist – If You’re Not Doing This You’re Putting Yourself At Risk

P2P lending, IFISA lending and other online lending is pretty simple and straightforward to do well, but only if you do all the routine things right.

Neither 4thWay’s lending tips nor any other educational information from us or elsewhere online can save you from disappointment, if you aren’t able to check off every item below.

Every checkbox below is an absolute basic requirement or you’re taking unnecessary risks that might wipe out all your efforts to select good lending accounts and loans.

Get the basics wrong and you could acutely magnify the ordinary sorts of problems or losses that you should normally expect to occur during the time you're money lending.

Don't score a genuine own goal. If you can’t check off all these boxes, make the required changes to substantially reduce your risks:

If not, you need to start exiting now by either selling or allowing borrowers to repay you naturally. You shouldn’t be re-lending now, because you can’t be confident that you’ll be able to exit swiftly when the time comes. And also because the risk of future losses goes up if you lend over too short a remaining time period.


The risk of losses from bad debts or other causes is dramatically smaller if you have sufficiently diversified. (As are other kinds of risks, such as all your money being tied in for longer.) We consider six lending accounts the minimum to contain these risks well, although more is better.

Roughly speaking, it should be at least perhaps a couple of dozen loans in each property lending account and a few hundred loans for small personal or small business loans.

It's okay to have one or two additional lending accounts in which you lend in fewer loans, but those should be extra accounts (above the minimum of six) and you should have much less money in them compared to your other accounts.

The risk of losing 10% or a lot more in an economic crisis and property crash is very real when you lend in one typical property loan. But the chance of losing 10% drops to close to zero when spreading fairly evenly across 100 typical loans in different lending accounts.

With small personal and business loans, you might in standard, typical loans need about 250 loans across all your providers to drop the risk of losing 10% of your lent money to 1-in-1,000.


Such short-term emotions have no place in medium- to long-term investing strategies.

Because sometimes, it probably will, in this form of investing.

Bottom line is that if you’re likely to need your money back in a hurry, you should either be lending less or not lending at all.
If you’re a sensible lender, you must expect that sometimes your money will get tied in until borrowers repay you naturally, even when using excellent lending accounts from high-quality providers. History has demonstrated this many times and it’s simply the nature of money lending. In return, you get greater stability of results compared to the stock market.

Being mentally prepared is hugely important. Too many lenders panic the first time they ever get bad news, especially as they’re surprised by it since things usually go smoothly. Panic leads to long-lasting (and unwarranted) feelings of shame.
It also leads to awful, snap lending decisions, such as selling all your loans quickly at a loss before interest you’re due to earn is able to make up the difference on any recent bad results.

If you lose money through your lending accounts due to cybercrime, you won’t be reimbursed. For sufficient hacking protection, you need to use either 16 letters (not 16 numbers) or 12 characters if it's a mix of numbers, upper-and lower-case letters and symbols.* Use pass phrases if they're easier to remember.


If you get it wrong

For those of you who see the above checklist but still fail to do all the above, and then suffer poor overall results, I just want to add that you needn’t feel guilt or shame. We all make big mistakes in our lives. Lots of them. This is just one of yours, that’s all. (And I’ve seen knowledgeable, intelligent people make mistakes just like this when investing!)

Try to accept what happened, accept responsibility without blaming others, learn from it and forgive yourself.

Further reading

Read our 10 Core P2P Lending Guide pages.

 

 

To get the best lending results, compare all P2P lending and IFISA providers that have gone through 4thWay’s rigorous assessments.

Independent opinion: 4thWay will help you to identify your options and narrow down your choices. We suggest what you could do, but we won't tell you what to do or where to lend; the decision is yours. We are 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 the FCA. 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.

*See the colourful table in How Long Does It Take for a Hacker to Crack a Password?

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