Are you a hands-on investor who enjoys evaluating investment opportunities and finding a diamond in the rough? If so you may want to consider investing in peer to peer lending. As a peer to peer lender you have the opportunity to review individual borrower applications and select the ones that you think are going to repay their loans.
What is Peer to Peer Lending?
For those of you not familiar with peer to peer lending (also know as P2P lending), let’s take a moment for a quick introduction. In the past ten years several websites (known as platforms) like LendingClub and Prosper have sprung up offering personal loans to individuals. This is certainly not unique but what makes them different is that they are not banks or financial institutions in the traditional sense. These websites get funding for the loans they provide from individual investors in amounts as small as $2,500. In a sense, anyone can be a banker with just a small amount of money. The signup process is quick and easy, and as soon as you transfer the funds you can start investing.
How Do You Invest in Peer to Peer Loans?
The process for P2P lending investing is pretty simple. Once you have opened and funded your account you will be able to see all of the loan applications that the platform has approved. These loan applications have been evaluated based on industry standard underwriting techniques and many are rejected. The ones that are approved are rated and the highest rated borrowers get the lowest interest rates.
Lenders review the approved loan applications and decide which loans they would like to invest in based on their comfort level with risk and their desired return. Investment in a loan can be as little as $25 and most experts recommend investing the minimum amount and spreading your portfolio over as many loans as possible in order to minimize risk through diversification. This is where you get to Do-It-Yourself. The platform provides dozens of pieces of information from the loan application and the borrower’s credit history. You get to determine which factors matter, how much to weigh them and what a good borrower profile looks like. To some people this may sound boring and tedious but for many investing junkies this is the fun part. You can look at data like length of employment, debt-to-income ratio, home ownership vs. renting, late payments, outstanding debt, bankruptcies and so much more.
There are a limited number of filters available on the platforms that allow you to quickly find loans that meet certain criteria, then you can review them in the more detail individually. Or, for the really hardcore investment analysis junkies, the information for all available loans can be downloaded to a spreadsheet for study and review. There are approximately 50 to 250 loans available at any given time and there are approximately 80 pieces of information available so, as you can imagine, this can be an enormous amount of data to review. However, with some simple sorting and filtering in your spreadsheet you can pretty easily identify the loans that meet your criteria.
There is also room for intuition and past experience in the analysis process. There may be more loans that meet your criteria than you have funds to invest. Ultimately, you may have to ‘go with your gut’ in order to select the loan or loans that you think are most likely to be paid back.
For those who want passive income or do not feel they are savvy enough to select quality loans there is also an auto invest feature that will choose the loans for you based on your desired risk/return level. But for the investment analysis enthusiast the DIY approach is the way to do. All in all, this can be a fun way to achieve a great return on your investment.
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