Second, I never invest (or lend) money I’ll need anytime soon.
Peer to peer lending sites typically allow loans to be repaid to investors over the course of three years, sometimes longer. Your money isn’t readily available from the lending site, but you can possibly sell your loan on the open market. Chances are pretty good you’ll take a hit, so to avoid that loss, I make peer to peer lending investments with “play money.”
Third, I factor in the fees when calculating my returns.
Prosper lenders pay a 0.5% to 1% annual servicing fee, based on the balance of the loan outstanding. Lending Club charges 1% of all payments received each month. If one of my loans goes to collections, I know I’m responsible for the collection agency’s fees. Those fees can take a bite out of your potential returns.
Fourth, I think like a bank.
Having been a banker for 5 years, I’m aware of the dangers of lending to people with varying degrees of credit worthiness. I also make certain I understand the logistics of each peer to peer lending site, whether Prosper or Lending Club. Lower credit grades DO command higher interest rates, but the risk of losing is also higher. So, when picking borrowers, it helps to think like a bank. I make sure I diversify among different borrowers and different credit grades. For example, if I had another $1,000 to lend, I would split that among 10 or 20 borrowers. Of course, $50 per loan may sound like small potatoes, but that’s exactly how most peer to peer loans get funded – a little at a time from a wide variety of investors. I would also diversify among credit grades by putting 20 percent of my money into a higher risk category, 30 percent into medium risk, and 50 percent into lower risk borrowers who are paying the lowest rates.
Peer to peer lending is a great option
For investors, it allows us to capture a little better return than those offered through traditional banking channels, albeit at a higher risk. For borrowers, person to person lending allows them to acquire cash at a lower rate than through a traditional banking channel. In short, we’re cutting out the middle man.
What factors in peer to peer lending do you think are important?