4thWay’s 10 P2P Investing Principles

This page was last updated on 20 September, 2020

Throughout this site, we call lending, “lending”. Funnily enough.

But that word can sound a bit casual and easy. Like you're giving some chums, some fellow neighbours or local businesses, a bit of cash in return for a bit of interest. A simple income on the side where everyone's a winner.

There is a social element to P2P lending, which is why it's sometimes called social lending. But it's certainly not casual. That's why it makes sense to always keep in mind that lending is also investing. Investing means taking some careful and controlled risks with your money.

That's why we call our principles P2P Investing Principles and not lending principles. Just as an extra reminder to you about the diligence that you need to conduct when looking at peer-to-peer lending, including P2P IFISAs.

Don't get me wrong, 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 and fear can all 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 in (and even individual loans if you want to go down that self-picking route).

These following Principles help guide us, and keep us on sensible and sure footing. They help us all to keep our own desires and worries in check, so that we can still sleep like a baby when the economy is sinking and bad debts are rising. They are also very solid rules to easily weed out most of the worst opportunities and to substantially lower the risks.

4thWay has now tested these principles since 2014 and they continue to be extremely effective. We've seen no reason to change them, even if we've occasionally tidied the wording up to make it even clearer. We believe that all lenders following all ten of these rules will easily have made a profit.

Principle One. If you have any doubt at all about lending through a specific P2P lending account or IFISA, 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 darndest 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 lines in the sand and only change them 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 a high confidence that you'll get all your money back.
Principle Nine. Don't borrow to lend. There might be rare 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 and don't get attached! Stay single. Think independently.

This was part three of our ten-page P2P lending guide

• Read part two: Is Peer-to-Peer Lending Safe For Lenders?
• Read part four: The 10 Key Peer-To-Peer Lending Risks Risks.
• See the contents of the whole guide.