How do you make your available cash to work harder than before? Peer-to-Peer(P2P) Lending or P2P Financing could be an answer for you. You can easily deploy your extra cash and lend it to small and medium enterprises (SMEs) and gain interest as high as 12% per year.
Why P2P Lending?
As we always share in previous articles, diversification is our gene and we always recommend diversifying not only just in different stocks or currencies but in different asset classes too as each asset classes always have its own cycle of up and down.
For P2P Lending, it is similar to Bond Asset Class but then the tenure is shorter, the risk is higher and the interest is better than usual bond interest too. For a typical bond, the bond yield is normally around 5-7% but then for P2P Lending, it can easily go up to 6-12%.
The key advantages of P2P Lending are as follows:
- Easy to set up. You just need to create a P2P Lending Account and put some money in and you will be able to earn interest right away. The P2P Lending platform that we recommend is Funding Societies
- The interest rate can get up to 12%, which is 3 -4 times higher than the usual Fixed Deposit. It also means your money work 3-4 time harder.
- Simple to manage as the Funding Societies will handle most of the stuff for you. What you need to do is to decide on available financing to put money in. Funding Societies will lend you your money, collect interest and principle and even follow out on default cases.
- Low Initial Investment Amount – You can start with as low as RM100.
- P2P Lending basically also provides you monthly repayments a month or two after your initial investment. It is great if you prefer consistent returns on a monthly basis.
Risks
As usual, whatever you are going to invest or trade, you must be aware of the risk. The most important risk for P2P Lending is the default risk, which means the SME that borrows money from you is not able to return the money and you might potentially lose all the principles.
Funding Societies will try to recover your fund. There are cases that they are able to recover but there are also cases that they won’t be able to recover. Hence, you need to prepare yourself for this situation.
Another risk of course is the platform risk where the platform misuses your money or runs away with your money.
How to De-risk?
To mitigate the default risk, you will need to diversify and perform credit score filtering. To diversify, you can easily do that by making a small portion of your investment to different borrowers. For instance, instead of lending RM1,000 to 1 borrower, you lend RM100 to different 10 borrowers. For the former example, if the only borrower default, you will lose RM1,000 directly while for the second example, even if 3 borrower default, you might only lose RM300.
For each loan in Funding Societies. you will be able to view the loan fact sheet and inside there you can see the SME credit score. The following are the SME credit score and potential default scaling that is attached to every loan. We recommend all our clients only provide loans to SMEs with credit scores of over 330 and above. This will help you to keep your default rate around 3%, you might have a defaulted loan out of 30 loans.
For platform risk, we can only mitigate or reduce this risk by selecting a reputable platform. This is the reason why we recommend Funding Societies. Some key facts for Funding Societies.
- Launched in 2015 and one of the best P2P platforms and SME Crowdfunding in Malaysia, Singapore, Indonesia, Thailand, and Vietnam.
- As of Aug 2022, over 5 Million of financing with over RM11.03 billion but with only a 1.29% default rate since inception.
- A lot of campaigns/opportunities for you to loan your money to high-quality borrowers every week.
- Regulated by Securities Commission Malaysia.
- Each campaign can get up to 12% interest per annum (before deducting fees).
- If you register with our link -> Funding Societies, we both will get RM30 if you invested a cumulative investment of RM1,000 within 60 days.
Our P2P Lending Approach
For Funding Societies, the minimum investment is RM100. How much you want to lend to each borrower will need to be determined by your total fund size. We recommend at least diversifying to a minimum of 20 borrowers or more to truly diversify the risk.
We have been testing and using Funding Societies for a few years and it is proven to be a great way to increase your passive income. As usual, we always start with a small amount of capital till it is proven to be working. We started with only RM1,000 a few years ago and till today, we manage to achieve 8.85% annualized portfolio performance. The best part of this is this is not like the stock market where the value of your stock might drop, what you need to prevent is the default risk and then the income will constantly come.
Our approach is always with a long-term mindset and would like this portfolio to grow to a substantial amount. The details are as follows.
- Every month, we top up an amount into this portfolio. For instance, RM500.
- Every week, we log in to the mobile app and monitor whether we have any loan that has been repaid.
- Whenever we have capital (either repaid or new fund from the top-up), we will monitor the new campaign and look at the loan fact sheet.
- Only invest in a campaign that has a credit score of more than 330.
- If we have an existing loan with that borrower, then we filter it till the current loan is repaid.
All these might look troublesome, but the actual fact is each time we only spend less than 5 minutes doing all the above. Hopefully, this can be an easy-to-implement Passive Income for you. Happy Investing!
