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Successful Peer to Peer Lending Investing

07.14.2011 by Guest Author //

Today we’ll reveal the single most important success factor for peer to peer lending investors.

As Matt has discussed before he used to be a borrower on Lending Club but is now an investor with a growing portfolio. Peer to peer lending provides an excellent opportunity for investors to start out small (the minimum investment is just $25) and slowly grow their investment. There are two main players in peer to peer lending: the aforementioned Lending Club as well as Prosper. The principles discussed in this article will apply to both companies.

An Average Return of 10%

The average return for investors in Lending Club and Prosper is around 10%. So even if you earn the average return you are doing better than almost any other fixed income investment. The big question is, as an investor how do you ensure that you earn at least the average return? The key is diversification. You need to spread your risk among many loans.

Here is an example to illustrate how important diversification is for your return. Let’s assume that you have $1,000 to invest and you spread your risk over four loans at $250 each. If one of those loans defaults immediately then you have made a big mistake and thus are down 25%. Now, if your $1,000 is diversified among 40 loans of $25 each and that same loan defaults, you are down only 2.5% of your total. A 2.5% loss is much easier to recover from than a 25% loss.

Unless you are investing a large amount of money (say more than $5,000) I think it is really important to keep all your investments to the $25 minimum per loan. Unless you are very lucky you will likely have some defaults over the life of each loan, even in the lower risk loans, so it is best to minimize the financial impact of any such losses.

How to Diversify

Now you have seen the importance of diversification it is important to put this into practice. There are two main ways to ensure you create a diversified portfolio of loans.

1. Automated Plans

Both Lending Club and Prosper offer some kind of automated plans. This is where you just choose your amount to invest and your investment criteria (such as risk level) then they will invest in the largest number of different loans that meet your criteria. Now, once your account has been open for a while you will start to get cash building up in it from the interest and principal repayments. Depending how much money you have invested this can build up pretty quickly. So every week or two you should login and put your cash back to work, where you can choose the automated plans again to diversify your new investment.

2. Choosing Loans Individually

If you have the time and the inclination then you can choose which loans to invest in manually. When confronted with typically 500 or more loans on the Lending Club or Prosper platforms it can be a little bit overwhelming trying to choose loans. This is why both companies provide filters so you can select some criteria so you can include only the loans you want. For example, you can choose to only include loan grades B, C and D. You could exclude loans where the borrower has had a delinquency in the past two years or if they have been employed in their current job less than a year. There are dozens of filters to choose from and by selecting some you can whittle down the large number of available loans to something much more manageable. Then you can view each loan and make a decision whether to invest or not. Of course, as I said above, I urge you to stick to the $25 per loan investment if at all possible.

The Final Word

Nothing will potentially lower your returns more than an undiversified loan portfolio. You will always run the risk of one default negatively impacting your returns in a big way. A broad diversification of loans will spread your risk and give you the best chance of receiving at least the average return. And at around 10%, the average return is pretty darn good.

About the author:  Peter Renton is the publisher of the Social Lending Network, a blog dedicated to peer to peer lending. He is also on Twitter @SocialLoans.

Categories // Investing Tags // Lending Club, peer lending, prosper

Earn High Returns with Peer Lending

04.04.2011 by Matt Jabs //

Back in 2009 I was the guy borrowing from peer lending investors.  Not anymore baby!

Investing in peer loans is paying me about $25/month… and that number grows with every loan I invest in.

Invest in peer lending

Peer lending is just another term for peer to peer lending, social lending, p2p lending, etc.

Now-a-days I’m the guy getting paid to loan money… and it feels really, really good.

One way I invest – and earn high returns – is by using peer lending platforms to loan money to people who are in the same position I used to be.  I enjoy doing this for two main reasons:

  1. I can help them get out of debt.
  2. I can earn high returns on my money.

I usually stay away from loans (a.k.a. notes) being used to finance things, like weddings or automobiles, and stick primarily to debt consolidation loans and sometimes business loans.

How much you earn will depend mostly on the notes you choose, how you choose them, and your use of the secondary market.

How much I earn with peer lending

I currently have nearly $4,000 invested in 90 notes.  I have had one note default and am earning a NAR (net annualized return) of 8.55%.

The average peer lending investor earns approximately 10% on their investment… so I’m a little behind the curve, but I’m learning – and will take a 8.5% return any day.

To date I have earned $212 in total interest… and I’m pulling in about $25 in interest a month, and this number grows monthly as I invest in more notes.

Tips for earning higher returns

Here are a few tips for those who want to start investing with peer lending:

  1. Before you choose loans be sure to pick solid criteria then save the criteria search.  I will elaborate more on this in a future post dedicated wholly to the subject, but for now just understand that you can filter the loans based on criteria like “no defaults in the past 3 years” and “credit scores of 700+”, etc.
  2. Keep an eye on the notes you invest in and resell troubled notes on the secondary market.  Again, I will drill down on specifics later, but just be aware that selling troubled notes on the secondary market is a crucial part of earning higher returns.  Don’t be intimidated by this either because it’s easy peasy, all you basically need to do is pick the loans you want to resell, price them at a discount and click “submit”.
  3. Diversify your notes.  By this I mean to invest in notes of different grades to balance risk and returns.  Peer lending platforms grade the loans based on borrower credit history and allow you to drill into the details and pick loans paying higher returns while still offering less risk – they’re there, you just have to look.

Those are the basics.  Feel free to ask questions in the comments section below.

How you can get started with peer lending

If you like the returns peer lending is delivering and want to get started, there are two companies I recommend in full confidence… Lending Club and Prosper.

Personally, I have more experience investing with Lending Club, but know both companies are sound and proven, so choose Prosper if their platform suits your needs better.

Categories // Investing Tags // Lending Club, p2p lending, peer lending, prosper, social lending

Tithe to Prosper – DFA Tip of the Week – 2/9/2009

02.09.2009 by Matt Jabs //

There are many ways to reduce costs in our every day lives, so to help do just that each Monday I will post a money saving “Tip of the Week”.

This weeks tip involves…tithing to your local new testament church!  This tip of the week is in direct correlation with my latest post My Testimony to the Tithe.

Probably the single best piece of financial advice I, or anyone, could give you is to tithe faithfully to your church. God is the giver of all things and has blessed us with all that we have both physically & spiritually.  All the money that we earn is provided us by the Lord.  He faithfully gives us the ability and opportunity to earn these monies and all he asks for in return is 10%.  When we are faithful to give this 10% that God challenges us to give He promises to “…open you the windows of heaven, and pour you out a blessing, that there shall not be room enough to receive it.”  Malachi 3:10

Will you accept that challenge from God today and give to His church?  He has given His life for us, should we not at least give 10% of our earnings back to him in obedience?  He promises to bless us for it.  I too promise that if you obey Christ in this area, you will truly be blessed and will be on the road to financial freedom.

“…he which hath begun a good work in you will perform it until the day of Jesus Christ…”  Philippians 1:6

Click here to see all past DFA Tips of the Week.

Categories // Giving, Tips Tags // church, prosper, tithe

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Popular Posts

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  • Debt Testimonials - Encouraging Success Stories!

Disclaimer

Content on Debt Free Adventure is for entertainment purposes only. Rates & offers from advertisers shown on this website may change without notice: please visit referenced sites for current information. Per FTC guidelines, this website may be compensated by companies mentioned through advertising, affiliate programs or otherwise. We respect your privacy. Privacy policy.

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