Lending money to someone, ensuring regular interest payments, and eventually the return of principal on time — it is a tough job.

Sure, P2P platforms make the task a lot easier for lenders. However, first-time lenders on these new digital platforms still find the task arduous. Here are a few common mistakes you can avoid and make money on a P2P lending platform.

Chasing High Returns

Interest rates as high as 30 percent can lure you to invest in P2P lending. However, lending with the sole objective of earning very high returns may not be a great approach. Investing only in high-risk borrowers may backfire.

“Don’t forget that the higher the returns, the higher the risk. Whenever you are investing in a new financial product, it becomes important to start slowly and gauge how you are succeeding in your investment plan.

Always start with small investments across different loan products. After gaining adequate experience you can decide on how to build your portfolio for the long term,” says Bhavin Patel, Founder and CEO, LenDenClub, a P2P platform.

Lack of basic understanding

Yes, it is true that you can earn higher returns through lending money on a P2P platform. But do you understand how a P2P platform works? What are the dos and don’ts of lending money on a digital platform? If you haven’t bothered to check these basic factors, you may be in for trouble.

As said before, do not focus solely on higher returns. Also, you should try to learn how various financial instruments, including P2P, work before investing in P2P platforms, say experts.

 Don’t focus on short-term returns.

“Do not compare P2P with equity bank investments in the short term. This is a 30-day product. Over a long period the returns can be similar to equity,” says Mukesh Bubna, Founder, Monexo.

This is the most common mistake committed by investors. Though the returns can be similar to or higher than equity in some cases, it’s essential to understand how the returns are calculated.

 Lack of diversification

Little or no diversification can impact your net returns from the portfolio. It’s advisable to spread the risk by dividing the amount among many borrowers.

 Not mentally prepared for delays

Many lenders do not pay attention to default rates. They are stunned when there is a delay in repayments. It’s imperative for investors to understand that sometimes there can be delays.

“Since the returns are on reducing balance and come in EMI form. Investors should be mentally prepared for delays, if any,” says Raghavendra Pratap Singh, Co-Founder, i2ifunding.

Common business practice dictates P2P platforms disclose their delay and default rates, something which investors tend to overlook.

Understanding these default rates will give investors a better idea of each platform’s risk. Investors looking at multiple platforms should try and draw correlations between the platform’s advertised average ROI and their default rates.