Defaults are inevitable in P2P lending. Our thorough credit assessment is one way we reduce the risk of defaults.
The simple interest rates on each listing is an indicator of the credit risk of the Issuer. The higher the interest, the higher the credit risk, which is summarized in the fact sheet that is published along with each listing.
There are various strategies that our investors have used to diversify.
Minimum amount into each and every financing term
Some investors prefer to invest the minimum amount possible into each and every single investment opportunity financing term. This way, even if one financing term were to default, the principal amount lost would not impact the entire portfolio heavily.
E.g. RM100 minimum into 50 financing term at average 12% p.a. yields you RM600 in gross returns. Assuming a 3% default rate on principal, your portfolio would still yield you RM450 in gross returns.
Higher amount into lower yield and lower amount into higher yield
Some investors prefer to invest more into lower yield financing term, since they are assessed to be stronger issuers and smaller amounts into the higher yield financing term.
A stronger Issuer would be charged between 8% - 10% in simple interest, while the ones assessed to have higher credit risk will pay between 12% - 16% p.a.
Example: RM1,000 into 3 investment opportunities financing term at average 9% p.a. and RM100 into 20 investment opportunities financing term at average 14% p.a. yields you RM270 from the lower yield financing term and RM280 from the higher yield financing term for a total portfolio gross return of RM550. Assuming a 3% default on principal, your portfolio would still yield you RM400 in gross returns.
Importance of reinvesting repayments
The power of P2P lending is truly demonstrated when investors reinvest their repayments. Since all the listings on our platform are from 1 to 24 months, investors will receive repayments in monthly installments or bullet repayments within 3 months. This gives you the opportunity to further compound your returns by reinvesting the repayments into new financing term, generating additional returns on both your principal and interest earned.
Example: You invest RM1,000 into a 1 month invoice financing note at 12% p.a.
After a month, you receive your repayment of RM1,000 principal and RM10.00 gross return. You then reinvest the RM1,000 into a 3 month business term financing at 12% p.a. After one month, you receive RM333.33 in principal and RM10.10 in interest. You reinvest RM300 into another financing term for 6 months at 12% p.a. Now you're generating further returns on your repayments that you've already earned interest on!