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P2P Lending: How To Dip Your Toe In

Sometimes I read in the financial pages what some commentators are saying on P2P lending and I'm quite unimpressed.

The general message seems to be that if you dip your toe in with a small investment, you'll learn quickly that it's safe, and then you can go all in.

Speaking as investors, we're fairly appalled. These people making these comments are clearly no great investors.

And if I talked to 4thWay's professional risk modellers about it, they'd be absolutely horrified.

How not to decide what to invest in

Dipping your toe in with a few pounds first is a terrible way to decide if an investment is safe.

Yes, by doing so you could get some reassurance that it's not a complete scam: you put a bit in and then withdraw it immediately to see if they'll let you have it back.

And, yes, you could learn more quickly whether it's the sort of thing you'd be willing and able to do by giving it a bit of a go.

But it tells you nothing – zero! – about how safe it is.

Dip your toe into…Lloyds Bank shares?

I could say the same thing about buying shares in Lloyds Bank. Or BT. Or any company on the stock market. Over most two-month periods, you probably won't lose a whole load of money. But would you take that to mean that those shares must be safe? Of course not.

Now, P2P lending is certainly more stable than the stock market on average, so if you put your money in at any given time you should generally expect to do fine over the following two or three months.

But not all P2P lending websites are safe and not all those that are safe today will remain safe forever.

Put another way, it's a bit like saying to someone that if they cross the road without looking to save time they'll be totally fine. You're probably right and they'll survive doing that for quite a few attempts, on many roads. But you don't need me to tell you that it's not safe.

There's a bit more to it than “dipping your toe in”

It's not rocket science choosing P2P lending websites and loans to lend through, but there's more to it than many investors are doing.

You have to look at the experience of the people running the P2P lending website. Does the website have FCA permission to operate? How long and how good is the website's record of bad debts? How fat is its provision fund set aside to pay bad debts?

In addition, you have to keep track of them. Is the P2P lending website's record of bad debts deteriorating? Is it accepting far more loan applications than it did previously? Are late payments on the rapid rise, and at a faster rate than the nearest competitors?

Where to start

The natural sweet spot for P2P lending is at the lower risk end. That's why 4thWay® put together a list of what we think are some of the safest options, in Get Started With the Safest Peer-to-Peer Lending Websites.

We also keep an eye out for any signs a P2P lending website is loosening its standards and becoming more risky. If you subscribe to 4thWay's newsletter below, we'll let you know of any warning signs.

Read more:

4-Step Strategy to Safe Peer-to-Peer Lending

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