How to choose a borrower for P2P lending?

With your decision to earn double digit returns, you would be looking forward to learn how to choose the best borrower profile for P2P lending and minimize risk?

To make this decision simple, you may follow these 5 steps to choose a borrower in a disciplined way.

1. Decide on an initial investment amount

The amount you decide to invest initially determines the risk you are willing to take in case of the worst scenario where all the borrowers default on payment. In case you are a beginner, you may check out the minimum investment amount for different P2P lending platforms (list of p2p lending platforms here) and select the one which suits your requirement.

Here is an example of RupeeCircle –

The registration fee for RupeeCircle can be waived off by this referral link. So you can start your investment for free.

The initial investment for this platform is Rs 5000 which is higher as compared to few other p2p lending platforms. However, the quality of borrowers and the returns are much better.

Non – performing assets (NPA)

The NPA which takes in account of the number of borrowers who have delayed their payment for 90+ days is around 2% in case of RupeeCircle. That means out of 100 borrowers there is probability that 2 people might default out of 100.

To make your odds better for maximum returns you need to choose multiple borrowers.

In case you invested in 1 profile and that person defaults you may lose your principal amount.

In case you invest in 2 profiles and only 1 default you have better odds.

To start with, you may want to diversify your money across 3 profiles for initial investment and then monitor the portfolio for the month.

Based on the repayments, you can scale up your portfolio across similar profiles. Also avoid profiles similar to the ones who have either delayed or defaulted on EMI payments.

2. Bureau Score

In India, there are 4 credit bureaus – CIBIL, Equifax, Experian & CRIF Highmark. These bureaus record the credit repayment history of borrowers on the basis of data reported by banks and other financial institutions.

Also, each of these bureau have their own rating mechanism in the form of a credit score for example CIBIL score is the most popular one which is you for making loan decisions. The bureau also reports if the borrower has made any defaults on previous loans.

Most of the P2P lending platforms provide this bureau score of the borrower. Generally CIBIL score > 700 is considered less risky. However, you need to look at score in tandem with the interest rate at which loan is been granted.

A borrower seeking loan at 20% p.a. with CIBIL score greater than 700 can be a good bargain for your investment.

3. DTI – Debt to Income Ratio

Debt to Income ratio refers to the amount of existing EMI payments divided by net income of the borrower. For e.g. if a borrower is having a salary of Rs 20000 per month, his existing loan EMI is Rs 5000 and he is availing a fresh loan with EMI worth Rs 5000, then his DTI shall be 0.5.

A DTI <0.6 is generally considered acceptable for lending business.

You may check this ratio in the borrower profile listed on the P2P lending platform.

Avoid profiles with DTI>0.8.

4. Accommodation Type

From stability point of view, you need to check if the borrower is living on rent, owned premises, parental property or company provided accommodation.

People living on rent have an additional burden and requires stability of income to ensure things are smooth.

You may avoid self-employed profiles or business loans where the borrower is living on rent.

5. Age & Number of Dependents

A young borrower with no dependents can be an ideal profile to start your investment with. Generally, you should avoid borrowers where the age is above 50 and the loan is being taken for a medical emergency.

With increased number of dependents, there are higher chances of income instability arising out of unforeseen expenses which increase the probability of EMI payment delays.

Once you have these basic factors in check, you should be able to carve out a better investment portfolio earning higher double digit returns.

To learn more about P2P lending, read how to earn 24% p.a. from P2P lending with auto investment.

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Post Author: Fintox_India