When you have graduated with student loans, the most common advice is to save up and chip away at the outstanding loan balance. However saving alone is not sufficient. You should research about how to increase your income, so that a balance is created between cash inflow and outflow.
You have a six month grace period when you graduate from college. The best advice would be to find a short term investment option for that period from which you can get return on your savings and also combat inflation.
When investing for the short term or the long term one really focuses on the viability of the investment and looks for ways to minimize risk. One of the most recent and popular investment options is the Peer-to-peer (P2P) lending platforms. Peer-to-peer lending platforms are online businesses that connect investors to lenders. They are a market place for loans. P2P platforms are an excellent venue for a short-term investment. However, we need to realize the risks and opportunities that it brings along? First of all risk is an inherent part of any business. While risk will always be there, successful businesses are those that minimize the risk to a level which is acceptable. Now what is an acceptable level of risk is a subjective to varying situations and each investor will have a different opinion.
The question that arises here is, how risky is P2P and is it worth investing your hard earned money in it?
How is your investment protected by peer to peer lending platforms?
There are many P2P lending platforms out there. Each platform has its own way of conducting day to day business and has a different way of managing and mitigating risk.
However the risk mitigation process can be broken down into four main steps, steps which you should look for before deciding which platforms to invest in.
1. Screening at the door
In order to ensure that money is given to credible borrowers who will make timely payments, effective screening is a must.
The basics of screening are to check the income source of the borrowers and whether or not that income will be able to match the repayment schedule. Most platforms have their own algorithms for determining borrower reliability. Besides the algorithm they also use major credit agencies and run backgrounds checks on individuals applying for loans. For example Zopa one of the most famous P2P platforms uses Equifax and Call Credit and its own algorithm too.
Some platforms also allow businesses to apply for loans. Funding Circle also facilitates business loans. However they ask businesses to show proof of generating a yearly USD 70,000 revenue. Also the business must be at least 2 years old and is liable to present proofs of returns filed.
P2P platforms help form a link between the investors’ money to the borrower’s needs. However when forming this link, they do not just invest the money of one investor in a single venture. That would mean risking it all. This is because if even one of the investors defaults than the whole investment will be lost. Most platforms have a must policy of diversification. The investment is split over multiple loans to minimize risk.
Funding Circle ensures that one person’s investment is split into a minimum of 100 loans and one single loan never exceeds more than 1% of the investment.
3. Provision Funds
Defaults are an inevitable part of a business that is giving loans out to people. What happens if the recovery, after a loan goes into default is not enough to repay the investment? In order to tackle such a situation most P2P platforms are now establishing provision funds. They deduct a small fee from each loan made and keep it aside to aid in paying back investors in case of a default.
Investing to generate more than one income stream during your grace period is a great idea and something that should be continued over your lifetime. However you have to ensure that your return on investment should match your loan repayment schedule.
In the worst case possible if you ever find yourself in a situation that shall lead you to miss a repayment date of your student loan you should not panic but immediately contact your lender and explain the situation to them. This might not only buy you some time but can also help to avoid bringing a negative impact on your credit score.