P2P Lending Strategies

In this post, I will take a look at some different P2P lending strategies that are commonly used by investors. There are many different approaches and you may learn something from seeing how others manage their P2P investments, as well as what resources are available to you as an investor. It is well worth your time to learn about and understand these options. Remember, this is your money on the line, so pride or laziness will not serve you well. After all, you don't know what you don't know, so study as much as possible before starting your investing or investing more than you already have. 

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DIY vs. Hands-Off
Many investors are attracted to peer to peer lending because they want to be actively involved in their investment and they enjoy managing their loan portfolios. I know I enjoy selecting loans and deciding what overall interest rate I am hoping to earn. However, there are some investors who either do not want to manage their portfolios, or feel that they are not capable. For these investors there are several options to get help. If you want to use P2P lending investing as part of your overall investment portfolio, but do not want to fully manage it yourself, then you can get expert assistance. The options range from help selecting loans but still making the selections yourself, to a fully managed account where you do nothing and an advisor picks all of the loans. Note that investors who get some type of help usually have signficantly higher returns. This is not surprising because it is a fact that the data provided on borrowers can be used to determine the likelihood of default.

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Low Risk vs. High Reward
One of the first decisions an investor makes is whether they want high risk, high interest rate loans, or low risk low interest rate loans. The lure of 25% interest is hard to some to resist, but it is important that you study return figures provided by Lending Club. What you will see is that  grade B and C loans have generally outperformed grade D and E loans on average. This is surprising, but the numbers are what they are, so you may want to focus on the highest performing grades. If you have expertise in the field, or are using an advisor (see above), then you may be more comfortable with lower grade loans. Whatever you do, make sure you are fully aware of the risks involved with the lower grade loans, particularly default rates and total return.

Diversification vs. Casino Style
The final important point to consider is how many loans to include in your portfolio. As with any investment, diversification is a very valuable tool. Investing in a small number of loans can lead to significant losses if there are more defaults then expected. Yes, it is possible to make higher returns with peer to peer lending if the number of defaults is lower than expected, but do you really want to take that chance? Most investment advisors suggest that this is not a good long term strategy. Lending Club recommends that an investor buy at least 100 different loans. This is a minimum and many experts suggest 200 loans or more.