Peer to peer lending offers an exciting investment opportunity. However it is important to be aware of the risks involved and some tools that may help you succeed.
Just how do you make money in Peer to Peer (P2P) lending? The concept is simple. You invest in specific loans and earn interest as the loan is paid back. P2P sites measure the risk of specific borrowers defaulting and assign interest rates to loans depending on the risk involved. As with any investment, the higher the risk, the higher the return (or the higher the interest rate charged to the borrower). Two popular P2P platforms are Lending Club and Prosper. Both of these platforms will charge you a percentage of the interest you earn as the loan is paid back. Usually this fee is one percent of the amount that the borrower repays. Opening an account on P2P sites is easy and requires a minimal investment, often only around 25 dollars. Lending Club claims that the average return for investors during the first three quarters of 2016 was roughly 6 percent. Given these returns, P2P lending can demonstrate yields much higher than an ordinary bank account.
But as with any investment your success depends upon your ability to diversify and to understand the risks involved before you begin the process. Above all manage risk by investing in many different types of loans. Prosper claims that portfolios on its site exceeding 100 notes (i.e. Loans) demonstrate consistently positive returns. The low investment threshold on many of these sites, means you can potentially fund hundreds of loans, each with different grades of risk. However even with diversification, success is not guaranteed. An obvious risk is that the P2P platform could default or even fall prey to hacking, threatening your investment. This method of investing is also relatively new and untested during periods of prolonged recession. Various economic conditions could result in unpredictable defaults among borrowers.
However third party tools can make it easier to diversify and spread risk
Tools like NSRInvest and Lending Robot automate the investment process. This makes it easier to diversify and invest in the best loans. Often attractive loans are full-funded within in minutes on P2P sites. These tools can help you avoid complicated process of analyzing each loan you may want to invest in. They link to your P2P investment account, select loans based on the criteria you set and automatically invest your funds in loans matching those criteria.
However considering the risks involved in this type of investment you may want to limit its impact on your portfolio.
Even with third party tools that help you diversify and spread risk, it is important to remember that this industry is new. It hasn’t yet demonstrated consistent returns over a long period time. There is also the more immediate risk that P2P sites could crash, resulting in irreparable loses. Considering these factors it is probably best to avoid putting too much stake in P2P lending as a major investment. Nevertheless peer to peer lending offers a novel way for you to make money, by acting as a commercial lender. If you choose to invest this way, make efforts to diversify, consider the risks and use third party tools to automate the investment process.
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.