Know your risk tolerance
Risk tags or risk tagging is the classification of loans based on the credit score of a borrower, which may be correlated with the borrower’s capability to pay the loan. In short, it is what lenders use to decide if they will choose to fund a loan or not.
Now that online Peer-to-peer (P2P) lending is gaining popularity in online investment community, it is time to learn how to navigate this new online investment territory, calculate risks, & conquer it.
First, learn how to read risk tags.
MoneyMatchPH empowers lenders to make an informed decision by giving you key information about the borrower, together with their risk tags. Risk tags coupled with the annual income, employment history, age, as well as the civil status of the borrower can then be used as a tool to analyse the probability of default, and also to calculate the risks of investment.
Return of Investment vs. Risk of Default
When it comes to choosing which loans to fund, keep in mind that the main objective is to achieve high return of investment (ROI), as well as balancing the risk of default. For this, you have to learn the concept of risk tagging and also how each loans fall under each classification.
Sure it is easy to understand that risk tag A is less risky than risk tag B, or C, but what does these risk tagging really mean?
RISK TAG A
- Have existing credit history.
- No history of default/late payment.
- Good credit score.
Investing in a loan that falls into this category can yield up to 14% Return of Investment or ROI. With its low probability of default, you can create a low risk investment portfolio with high probability of good return.
RISK TAG B
- Have existing credit history.
- With late payment/default history, but was already settled.
- Average credit score.
This risk profile can generate up to 21% rate of return. If you are still figuring out your risk tolerance in lending investments, this medium risk loans may be the best option as it has average probability of default, but may yield higher return.
RISK TAG C
- No existing credit history; &
- New to credit.
- Have existing credit history; &
- With history of unsettled default.
High Stakes Investment
If you are a risk taker when it comes to investments, this risk profile can match your high risk tolerance. In addition, it can generate up to 32% return of investment. It has high risk or probability of default, but can produce more money with highest return of investment.
Controlling the risk
Borrowers are categorized into 3 risk tags based on their credit history and profile; such as job, age, & social status, among others. MoneyMatchPH discloses these essential information as well as the loan terms, so that you can make an informed decision on where to lend money. Thus giving lenders full control of your funds as you can choose loans that’s within your risk tolerance.
Risk tolerance is the range of risk tags that is acceptable for you as a lender, or the loans that falls under your risk preferences and investment appetite. Furthermore, risk tolerance in MoneyMatchPH can be set by customizing your ‘investment criteria’, if you want to only see loans that match your risk preference.
Managing the risk
Remember that MoneyMatchPH also allows lenders to fund multiple loans with different risk tags. For only a minimum of ₱5,000 each loans, and multiples of ₱5,000 increments. Altogether, these means you can spread your investment capital across different risk tags to create a diversified lending investment portfolio. In the long run, a diversified portfolio can earn a more stable return of investment and minimize the risk.
Generally speaking, just like managing your stock market investments, P2P lending requires a certain level of analysis of probability. However, P2P lending is relatively easier to manage than stock market, Forex trading, cryptocurrency, and other online investments available in the market.