The peer-to-peer lending (P2P lending) industry has seen explosive growth in recent years.
Lending Club, the world’s largest P2P platform, has served over $55 billion in new loans in 2017. That’s a 40% growth in loan volume compared to last year.
In its early years, P2P lending mainly connected individual investors to borrowers in need of micro loans. But the industry’s successful track record and market-beating yields eventually attracted the big banks.
Now, the likes of Goldman Sachs serve about 70% of all peer-to-peer loans.
Although institutional involvement in P2P markets added to the credibility of this relatively young industry, it has also led to more competition.
P2P lending is still a place to earn market-beating yields of up to 7%. But private investors are now competing against the world’s biggest financial institutions. So it’s important to have a good plan.
Here are three keys to implementing a successful peer-to-peer investment strategy.
1. Spread Your Risk and Invest No Less Than $5,000
Investing in a consumer loan portfolio only makes sense if you have a diverse pool. Each loan should only be a small fraction of your total portfolio. This is not an asset class that you want to put too many of your investment eggs in one basket.
It’s not wise to invest in anything less than a portfolio of 100 different loans. Ideally, your portfolio should be spread across 200 or more loans (learn more in our free report on investing in P2P loans).
The minimum investment amount per loan is $25 on Lending Club. That means you should be prepared to invest a minimum of $5,000 when you get started.
You should also diversify your portfolio across different risk profiles. It may be tempting to allocate more funds in the higher-yielding loan pools, but that comes with higher risk.
A lower FICO score means there is a greater risk of default. It takes a lot of good loans to pay for one bad loan. It’s best to spread out your portfolio across multiple risk profiles.
2. Use Automated Rebalancing Tools
With the recent influx of institutional money, P2P lending has become much more competitive. The best quality loans can be snapped up within minutes of being posted. This is why investors use third-party peer-to-peer tools.
The fast pace of loan purchases on P2P platforms requires that investors use automated filtering and selection tools.
NSRInvest.com is a registered advisor that offers managed accounts to P2P investors. Investors can link their Lending Club and Prosper accounts to the website and have NSR experts invest for them based on their loan selection criteria.
Loan filtering can help investors consistently outperform the market. Based on back testing from NSR, the most effective filters are: loan grade, credit inquiries in the last six months, and loan purpose.
Although default rates are higher on grades D–G at Lending Club and grades D–HR at Prosper, the ROI can be higher too. Loan filtering can help you successfully invest in these lower grades.
NSR also has automated secondary-market trading and detailed loan selection algorithms that provide more liquidity for investors (learn more in our free report on investing in P2P loans).
Users pay a fee of 0.45%–0.60% of the total value of all notes they buy on NSRInvest (excluding charge-off loans) plus the average daily idle cash balance during the billing period.
Depending on the selected strategy, NSR users have outperformed the market by as much as 2.6% (average is 1.5%).
Not only will NSR help deliver higher returns, it will also save you a lot of time and energy by automating the execution.
3. Enhance Your IRA with P2P
Debt is not a particularly tax efficient asset class because of the rates you pay on interest can be high. Investors can also link their self-directed IRA to both Lending Club and Prosper to take advantage of tax-deferred earnings to enhance their retirement.
Follow these three simple steps and you can implement a successful P2P investment strategy.
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