Peer-to-peer (P2P) lending is currently gaining considerable attention. Two major P2P lenders in America include Prosper and LendingClub. Let’s understand how they operate: Borrowers post their loan request publicly, and lenders chip in to provide the funds. The borrower receives the full amount once it’s completely funded, after which they follow a set repayment plan every month, including paying the interest and any penalty for late payments.
What sets P2P lending apart is the impressive rate of return. It outperforms many conventional investment sources. I’ve already set up my account on LendingClub, put aside a decent amount of money, and thoroughly researched in preparation for my first loans on the platform. Throughout this process, I realized some crucial insights, which could be considered “best practices” for novice lenders.
DIVERSIFICATION IS CRITICAL
When involved in P2P lending, the risk of losing money as a lender is relatively higher compared to bank-guaranteed investments like CDs or bonds. One effective risk management strategy is diversifying your loan portfolio.
Before deciding to finance a loan, you must scrutinize the borrower’s profile – factors like employment history, credit rating, and public records. Loans involving higher-risk applicants offer higher returns but also carry a significant default risk. However, both LendingClub and Prosper transparently provide data, allowing you to examine the default rate for each credit grade before offering a loan.
Some lenders have noticed robust returns while financing borrowers with poor credit scores. However, these loans are still new, and there are some early late payment indications alluding to potential future defaults. Other more conservative lenders prefer sticking to applicants with excellent or good credit ratings. Although the returns are less, these still substantially beat CD interest rates, generally by threefold.
From my observations of other investors’ strategies, the effective approach is to finance multiple similar loans, each with amounts as low as $25. This strategy shields you from major losses unless a large number of loans default. Reduce this risk even further by financing an assortment of credit grades, with a particular focus on excellent and good ones.
KEEP YOUR MONEY ACTIVE
After setting up my LendingClub account, my agenda is to keep my money active. As soon as the borrowers repay their loans, I want to reinvest those amounts to continuously earn interest – I don’t want to keep any idle cash in my account.
I’m both excited and a bit nervous about this venture. My general habit is to spend any saved money imprudently. However, once invested via LendingClub, my money will be used wisely at last.
Are you interested in P2P lending? Then, you might find our LendingClub review informative.
