Did you know that over 200,000 people in the United States are investing in peer to peer (P2P) loans? While P2P investing has only been around for about 12 years, it has become a very popular investment for individuals.
Peer to peer lending platforms such as LendingClub and Prosper allow individuals to provide the funding for personal loans. Many people are turning to LendingClub and Prosper for personal loans, which has become a unique and profitable investment opportunity.
While the borrower experience is very similar to traditional lenders, individuals with money to invest are now able participate in this unique industry. Investors get to choose which loans they would like to invest in, and how much they want to invest in each loan. Here are 4 simple tips that can help you be successful with this unique investment.
Tip #1: Learn Before You Start
Some things in life you learn by doing. P2P investing should most definitely not be one of those things. You don’t have to become an investing expert, but it is essential to learn the basics of investing in personal loans before you begin. The platforms will give you a lot of information about how investing works, and how to use their technology. You should read everything they provide. In addition, it is important to read blog posts by experienced P2P investors. They will not only offer insights and expertise, they will also tell you the potential pitfalls and challenges you may face.
Tip #2: Know the Risks of Peer to Peer lending
As with any investment, P2P lending is not without risks. The vast majority of investors make money; however, there are some who do not. If your strategy is flawed then you could sustain a significant loss of capital. Also, you will be missing out on large potential gains in other types of investments, which is commonly known as opportunity cost since you are missing out on a great opportunity elsewhere. Another risk associated with this type of investment is that it is not liquid. Once you have invested in a loan it is hard (but not necessarily impossible) to get your money back quickly. You will have to wait until loan payments are made each month over the life of the loan.
Tip #3: Diversify
As mentioned above, investors do risk suffering losses. There is one simple way to mitigate this risk, which has proven to be very successful. According to LendingClub, 98% of accounts with more than 100 loans of relatively the same loan amount have seen positive returns. This fact means that diversification is incredibly powerful in ensuring that you make money on your investment. In fact, many advisors suggest holding 200 or more loans at a time. While it may be tempting to put a lot of money in a small number of loans that look really good, you should invest with your head and not your heart.
Tip #4: Use Automated Investing
The platforms provide a tool called automated investing. The automated investing tool allows investors to select specific criteria for their account. Investors can choose from dozens of criteria, and they can make changes whenever they like. When loans are offered that meet those criteria, and the investor has available cash, the platform automatically invests in the loan. Using this tool means that you do not have to spend much time, and you will not have cash sitting in your account unused.
Sounds simple, right?
Investing in peer to peer lending is pretty simple. The platforms are very robust and have evolved to the point where the experience is smooth and easy for investors. While there are risks involved, the fact that investors continue to pour billions of dollars into personal loans makes it clear that peer to peer lending investing can be successful.