Peer-to-peer lending investing has been attracting a lot of attention recently. Many companies have recently gone public and have grown very quickly. As such, a lot of people have started to invest in lending through the peer-to-peer lending platforms. If you are considering investing through these platforms, you really need to do your homework to know what you are getting into. Below are a few tips and thoughts on investing in peer-to-peer lending:
- Diversify your loans/spread your money over many loans: It is very important to spread out your investments into a loan portfolio to diversify and spread out your risk. The minimum investment amount per loan is $25, and it is recommended to have at least 250 individual investments. That means you should be prepared to invest at least $6,250, but the more you diversify, the lower probability one loan can hurt your overall investment. To get the full benefits of diversification, make sure you have a portfolio that it well distributed by geography, score, and key risk criteria. It is also important to understand the concept that it takes a lot of good performing loans to pay off one bad loan. You can lose your entire investment on a bad loan, but you only receive 7-25% interest rates on the performing loans.
- Consider the longevity of your investment: Losses increase as time progresses. Few people who borrow default within the first year, but as time goes out that probability increases. You need to make sure you consider investing over the long haul as these terms are typically three to five years. These loans are rather illiquid as well so if you need to get out of the investment you will likely take a substantial loss.
- The investment is not insured: if you provide financing for loans, you are taking a speculative bet. This is not guaranteed or backstopped by the FDIC. Also if one of the peer-to-peer lending platform companies goes bankrupt, you will likely lose your entire investment. This is obvious, but you need to make sure you know this before you invest.
- This is a speculative investment: There is still very limited data for these borrowers and peer-to-peer lending platforms. As such, the investments are speculative, and you need to know you risk losing your entire investment. Consumer-lending assets can be very profitable, but you have to be willing to do your diligence and homework before you invest.
- Perform your own diligence: Make sure you assess the individual before lending to the individual. If you see a lot of credit card debt, and a lot of missed payments, etc., then you should tread lightly on investing in this person. Do not just go by the platform’s “score/rating”, do your own diligence.
Make sure you do your homework and assess your total overall investment portfolio before considering investing in peer-to-peer lending.