Are you a peer-to-peer (P2P) investor?
If so, you might be wondering how to make the most of your investments. What moves can help you lower risk and potentially boost returns?
If you want to improve your skills, take these peer-to-peer lending tips into consideration before you make your next investment.
What’s P2P Lending?
Quick background for those of you who haven’t heard of this: P2P lending refers to an online marketplace through which ordinary individuals can issue unsecured personal loans to other individuals.
For example, let’s say Joe from down the street has an extra $10,000 that he’d like to invest. He wants an alternative to stocks and real estate, so he looks into becoming a peer-to-peer lender.
Meanwhile, Bob from the other side of the street needs an extra $10,000 to replace his leaking rooftop. He can’t obtain a home equity loan or home equity line of credit from the bank, so instead, he turns to the P2P marketplace.
Two of the biggest P2P companies are Lending Club and Prosper, both of which facilitate these types of transactions.
With that background established, here are top tips for people interested in becoming P2P lenders.
1. Research before you invest
Study the loan history of the lending company you’re thinking about working with. Ask questions such as:
- What percentage of loans fall into default?
- How are borrowers screened and evaluated?
- What average returns have investors produced in the past?
- What’s the process for handling late payments?
Don’t cut corners when studying the track record of company’s investment history.
It’s important to remember that not all lending platforms are the same and they all follow different business practices. Different lending platforms will have different procedures for screening, late payments, and defaults.
Look to investors who have had success with P2P lending and learn from both their mistakes and their triumphs. Use free lending tips on websites such as Lending Academy or Lending Memo to learn from people with practical, everyday experience with P2P lending practices.
Remember, if you feel like you don’t have the answers yet, don’t get started.
2. Start slow
If you’re just getting started with P2P lending as an investment tool, take it slow. Reading and research are great, but there is no better teacher than first-hand experience.
Don’t feel like you need to rush into the market and loan large amounts of money. Take advantage of the opportunity to lend smaller amounts, even $25 per loan. Having a smaller amount invested at the beginning will give you time to understand your lending platform and prevent yourself from making costly mistakes.
If you take too much on too soon, before you really understand the mechanics of P2P lending, you might start to feel overwhelmed.
“P2P lending is not passive. You need to spend time finding new loans to invest in. If you don’t have time, then start small and see if P2P lending is a good fit for you,” suggested Joe Udo, Editor-In-Chief at RetireBy40.org, in a recent article.
3. Know your risk tolerance
Everyone has a risk level they’re comfortable with. You need to know yours before you begin investing.
As with all investments, higher risk usually equals higher reward. Lending to a low-grade borrower will bring in potentially higher yields but greater risk than lending to a high-grade borrower.
“Think carefully about how much risk you are prepared to take, bearing in mind that you could lose the whole of your investment in a loan if it defaults,” wrote Graeme Marshall, CEO of FundingKnight.
4. Diversify your loans
Diversification, diversification, diversification.
If you want to minimize the risk of defaults and protect your investments, aim to hold at least 500 notes. This is easy to do if you invest your money in loans with balances of only $25 to $50 per loan. If your money is diversified across hundreds or thousands of loans, your profits are likely to be higher than your defaults.
5. Reinvest your returns
Don’t necessarily cash out your P2P returns the moment you’re able. Take advantage of the compounding yields by continually reinvesting your returns into new loans.
Alternatively, give yourself a “guaranteed return” by using your P2P returns to repay one of your own debts, like your mortgage or a student loan.
6. Use automation to reinvest
Keeping your principal and interest fully invested is the best way to make the most of your investments. If you have to make a decision about every $25 balance manually, P2P lending won’t be worth your time. Without automation, it’s a hassle to keep every bit of money constantly reinvested.
Make use of automation, and let the lending platforms do the dirty work for you.
7. Keep a strong emergency fund
Before you become a P2P lender, make sure that you have a strong emergency fund that can cover your own personal expenses. You won’t able to withdraw money from the P2P platform at a whim.
Know the game
Investing with P2P lending platforms is a fairly straightforward process, but you need to take reasonable precautions like the ones outlined above.
Follow these tips, keep learning everything you can, and never take on more risk than you know you can handle.
Photo credit: 401kcalculator.org
Interested in refinancing student loans?Here are the top 6 lenders of 2018!
|Lender||Variable APR||Eligible Degrees|
|Check out the testimonials and our in-depth reviews!
1 Important Disclosures for Earnest.
To qualify, you must be a U.S. citizen or possess a 10-year (non-conditional) Permanent Resident Card, reside in a state Earnest lends in, and satisfy our minimum eligibility criteria. You may find more information on loan eligibility here: https://www.earnest.com/eligibility. Not all applicants will be approved for a loan, and not all applicants will qualify for the lowest rate. Approval and interest rate depend on the review of a complete application.
Earnest fixed rate loan rates range from 3.89% APR (with Auto Pay) to 7.89% APR (with Auto Pay). Variable rate loan rates range from 2.47% APR (with Auto Pay) to 6.97% APR (with Auto Pay). For variable rate loans, although the interest rate will vary after you are approved, the interest rate will never exceed 8.95% for loan terms 10 years or less. For loan terms of 10 years to 15 years, the interest rate will never exceed 9.95%. For loan terms over 15 years, the interest rate will never exceed 11.95% (the maximum rates for these loans). Earnest variable interest rate loans are based on a publicly available index, the one month London Interbank Offered Rate (LIBOR). Your rate will be calculated each month by adding a margin between 1.82% and 5.50% to the one month LIBOR. The rate will not increase more than once per month. Earnest rate ranges are current as of Month/Day/Year, and are subject to change based on market conditions and borrower eligibility.
Auto Pay discount: If you make monthly principal and interest payments by an automatic, monthly deduction from a savings or checking account, your rate will be reduced by one quarter of one percent (0.25%) for so long as you continue to make automatic, electronic monthly payments. This benefit is suspended during periods of deferment and forbearance.
The information provided on this page is updated as of 08/21/18. Earnest reserves the right to change, pause, or terminate product offerings at any time without notice. Earnest loans are originated by Earnest Operations LLC. California Finance Lender License 6054788. NMLS # 1204917. Earnest Operations LLC is located at 302 2nd Street, Suite 401N, San Francisco, CA 94107. Terms and Conditions apply. Visit https://www.earnest.com/terms-of-service, email us at email@example.com, or call 888-601-2801 for more information on ourstudent loan refinance product.
© 2018 Earnest LLC. All rights reserved. Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by or agencies of the United States of America.
2 Important Disclosures for Laurel Road.
Laurel Road Disclosures
APR stands for “Annual Percentage Rate.” Rates listed include a 0.25% EFT discount, for automatic payments made from a checking or savings account. Interest rates as of 11/8/2018. Rates subject to change.
Variable rate options consist of a range from 3.27% per year to 6.09% per year for a 5-year term, 4.64% per year to 6.14% per year for a 7-year term, 4.69% per year to 6.19% per year for a 10-year term, 4.94% per year to 6.44% per year for a 15-year term, or 5.19% per year to 6.69% per year for a 20-year term, with no origination fees. APR is subject to increase after consummation. The variable interest rate will change on the first day of every month (“Change Date”) if the Current Index changes. The variable interest rates are based on a Current Index, which is the 1-month London Interbank Offered Rate (LIBOR) (currency in US dollars), as published on The Wall Street Journal’s website. The variable interest rates and Annual Percentage Rate (APR) will increase or decrease when the 1-month LIBOR index changes. The variable interest rates are calculated by adding a margin ranging from 0.98% to 3.80% for the 5-year term loan, 2.35% to 3.85% for the 7-year term loan, 2.40% to 3.90% for the 10-year term loan, 2.65% to 4.15% for the 15-year term loan, and 2.90% to 4.40% for the 20-year term loan, respectively, to the 1-month LIBOR index published on the 25th day of each month immediately preceding each “Change Date,” as defined above, rounded to two decimal places, with no origination fees. If the 25th day of the month is not a business day or is a US federal holiday, the reference date will be the most recent date preceding the 25th day of the month that is a business day. The monthly payment for a sample $10,000 loan at a range of 3.27% per year to 6.09% per year for a 5-year term would be from $180.89 to $193.75. The monthly payment for a sample $10,000 loan at a range of 4.64% per year to 6.14% per year for a 7-year term would be from $139.65 to $146.76. The monthly payment for a sample $10,000 loan at a range of 4.69% per year to 6.19% per year for a 10-year term would be from $104.56 to $111.98. The monthly payment for a sample $10,000 loan at a range of 4.94% per year to 6.44% per year for a 15-year term would be from $78.77 to $86.78. The monthly payment for a sample $10,000 loan at a range of 5.19% per year to 6.69% per year for a 20-year term would be from $67.05 to $75.68.
However, if the borrower chooses to make monthly payments automatically by electronic funds transfer (EFT) from a bank account, the variable rate will decrease by 0.25%, and will increase back up to the regular variable interest rate described in the preceding paragraph if the borrower stops making (or we stop accepting) monthly payments automatically by EFT from the designated borrower’s bank account.
3 Important Disclosures for SoFi.
4 Important Disclosures for LendKey.
Refinancing via LendKey.com is only available for applicants with qualified private education loans from an eligible institution. Loans that were used for exam preparation classes, including, but not limited to, loans for LSAT, MCAT, GMAT, and GRE preparation, are not eligible for refinancing with a lender via LendKey.com. If you currently have any of these exam preparation loans, you should not include them in an application to refinance your student loans on this website. Applicants must be either U.S. citizens or Permanent Residents in an eligible state to qualify for a loan. Certain membership requirements (including the opening of a share account and any applicable association fees in connection with membership) may apply in the event that an applicant wishes to accept a loan offer from a credit union lender. Lenders participating on LendKey.com reserve the right to modify or discontinue the products, terms, and benefits offered on this website at any time without notice. LendKey Technologies, Inc. is not affiliated with, nor does it endorse, any educational institution.
5 Important Disclosures for CommonBond.
Offered terms are subject to change. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900). If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown.
All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 2.28% effective October 10, 2018.
6 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|2.47% – 6.99%3||Undergrad & Graduate|
|2.57% – 6.97%1||Undergrad & Graduate|
|2.57% – 8.09%4||Undergrad & Graduate|
|3.02% – 6.44%2||Undergrad & Graduate|
|2.50% – 7.24%5||Undergrad & Graduate|
|2.79% – 8.39%6||Undergrad & Graduate|