How To Make Money with Peer-To-Peer Lending

While pundits love to point out how dicey today’s investment environment can be, the truth is that investing in any economy is inherently uncertain. However, it can’t be denied that traditional investment options leave much to be desired these days. Real estate is rocky and mutual funds offer meager returns. One alternative that’s gaining popularity among savvy investors is peer-to-peer lending. P2P lending provides borrowers with attractive interest rates and allows investors to net excellent returns. If you’re interested in securing consistent, above-average returns with P2P lending, the following introductory guide should be quite helpful.


Learn About the Industry


Before you can craft an intelligent investment plan, you need to understand how P2P lending works. In a nutshell, lenders bid on investment options based on the minimum return they expect from a borrower such as a small-time entrepreneur or student loan holder. The money pledged by the lowest bidders is packaged into one loan and handed over to the borrower. For sites like Prosper and Lending Club, the minimum investment is $25. The typical investor on either site can expect to see somewhere in the vicinity of 10% as far as returns go. 

 

Devise an Investment Strategy

There are a million and one ways to structure your P2P lending portfolio depending on your willingness to take on risk. Obviously, the riskier loans will boast higher potential returns. Fortunately, the major lending sites rate any given loan note based on the creditworthiness of the borrower. For instance, Lending Club grades notes on a sliding scale from A to G depending on the likelihood of default. If you want to shoot for lower but less risky returns, you could have your lending site spread out your investments for you.

Address Tax and Legal Restrictions

Before you can invest in peer-to-peer lending, you’ll need to find out if your state allows it. Only 28 states at present allow P2P lending. In order to invest on most sites, lenders need to be at least 18 of age, possess a Social Security number, have a checking account and earn a minimum of $70,000 annually. You’ll need to submit to a background check as well. Once signed up, they’ll submit a 1099 form to the IRS for you. Since the rules regarding taxes on peer-to-peer returns can be complex, it’s best to have your accountant crunch the numbers for you.

Join a few P2P Lending Sites

It’s best to start with an established site like Prosper or Lending Club. Both platforms have their own unique benefits and drawbacks. While Lending Club issues more loans per month, Prosper is catching up quickly. Both sites boast roughly the same return rates. It should be noted that Prosper’s site is a bit more user friendly. Ultimately, both platforms are a great way to jump into P2P lending for the inexperienced. For UK investors, options include Zopa, Rate Setter and Funding Circle.

Settle on Your Starter Investments

For more of an “auto-pilot” investment approach, put most of your money in Grade A through C notes with a little extra invested in riskier ventures. Both Prosper and Lending Club will recommend investment baskets based on your risk appetite. This is a fairly safe approach since the average Lender Club borrower has a 705 FICO score and $70,941 in annual income. If you’re investing in notes on a case-by-case basis, familiarize yourself with a particular niche such as SMB or credit card refinance loans and study each potential investment carefully.

Leverage Big Data to Guide Your Efforts

Much like stock and commodities investing, P2P lending investment is a lot easier if you have the right tools at your disposal. Fortunately, there are a number of online utilities like LendstatsLending Robot and BlueVestment that can help ordinary investors to improve their odds of success. Furthermore, it’s important to stay on top of the latest P2P lending news through blogs like Lend AcademyPeer & Social Lending and Orchard. The more you know, the more likely you’ll be to lock down stellar profits.

 

Assess Your Results & Adjust

At some point, you’ll need to take a cold, hard look at the performance of your investments. After a few months, you should have a good idea of whether or not your current strategy is viable. You may need to adjust your risk structure or ditch a note if it looks likely to default. Though borrowers who default are pursued via a collection agency, there’s always the risk that some investments will be a write-off. Both Lending Club and Prosper allow lenders to sell notes via a trading platform for a 1% commission. 

 

Getting to the Next Level with P2P

Though the principles of sound investing remain unchanged, new technologies like peer-to-peer lending allow investors more freedom than ever before. For serial entrepreneurs, P2P lending expands profit opportunities in a number of ways. As an example, you could use it to fund your own pet projects and offset liabilities with other investments. For forward-thinking entrepreneurs, it can be a powerful hedge that provides flexibility and a fair degree of safety as well. If you’re willing to master the ins and outs of P2P lending, a whole new world of business possibilities will open up to you.

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