Peer Loan Investing
New to peer to peer loan investing or just want to refresh your memory on how it works? PeerLoanAdvisor.com is here to help. We hope the guide below will help you improve your understanding of P2P loans and how to invest in them profitably.
What are peer to peer loans?
Peer to peer loans allow a borrower to get a loan without going to a bank or traditional lender. Most loans are for debt consolidation or to pay off high interest rate credit cards. Other reasons for borrowing this way include purchasing a car, taking a vacation, home improvement and getting married. Peer loans (or P2P) are funded by individuals all over the country. These investors can earn relatively high returns on their money. Each loan is funded by many investors so the risk of default is spread out. An investor can (and should) fund many loans in order to minimize the impact of defaults.
What does Peer Loan Advisor do?
We have developed an algorithm which considers up to 15 pieces of data from a borrowers application and credit history. Each data element is weighted based on its past correlation to loan defaults. This algorithm produces a score from 0 to 100 for each loan.
How do I choose loans for my portfolio?
Lending Club provides extensive data for each loan available for investment. Lenders normally have an investment strategy, which can range from safe (investing only in the highest grade loans) or risky (investing only in the lowest grade loans). Based on their rate of return goals and risk tolerance, a lender will look at specific loans and select the ones that they believe are most likely to be repaid. Alternatively, an investor can use automated investment where Lending Club will select the loans. We do not recommend this method since active educated investors are likely to have higher returns. Investors using automated investing may not even see returns that are average for the grade of loan in which they are investing.
How risky are peer loans as an investment?
The answer to that question depends on which loans you choose to invest in. Lending Club grades loans from A to E, with A being the least risky and E being the most risky. You will want to determine your risk tolerance which is your feeling towards the possibility of losing money. If you want the highest return possible and are not too afraid of having periods where your investments are not doing very well then you have a high risk tolerance. On the other hand, if you worry about losing money even over a short period of time then you have a low tolerance for risk.
What type of investment return should I expect?
It depends on which loans you select for your portfolio. Lending Club provides historical rates of return which you should review before investing. Your risk tolerance will be a big factor in the loans you select and therefore affect the upside potential of your investment return. Learn more about How Much You Can Make Peer to Peer Lending
Are these loans secured?
No, P2P loans are unsecured. That means if the borrower does not pay the loan back then there is no collateral (such as a house or car) that can be taken and sold to pay the debt. Lending Club does use debt collectors and report to credit rating agencies so there is certainly a downside for borrowers who do not repay their loans.
How do peer to peer loan investments compare to other investments?
P2P loan investments are similar to investing in bonds or bond mutual funds. Returns can be similar and the risk is similar although likely to be at least a little higher. Again, you must diversity your loan portfolio and investment in at least 100 different loans. Lending Club claims that 99% of accounts have had a positive return so that should give investors some comfort. Of course, over the long term, returns will probably be a little lower than investing in the stock market.
The loan ratings provided by PeerLoanAdvisor.com is an opinion and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. Analysis on this site, including ratings, and and information provided are statements of opinion as of the date they are published and not statements of fact. Loan ratings are not recommendations to invest any loans or to make any specific investment decisions. PeerLoanAdvisor.com assumes no obligation to update the loan ratings for content following publication in any form or format. Loan ratings and information on this site should not be relied on and are not a substitute for the skill, judgment and experience of the user and their investment advisors when making investment decisions.