Have extra cash sitting around? Do you want to become the BANK?

Peer to peer lending platforms have been around for many years now and the returns to investors are pretty good when compared to an online savings account paying around 2%, and much better than brick and mortar banks that typically pay really low rates.

In peer to peer lending you lend your money to individuals directly and earn a rate of return depending on the borrowers risk. There are many types of per to peer loans you can make such as loans to individuals, businesses, real estate projects etc. I will be focusing on lending to individuals in this article.

The two main peer to peer lending sites that are geared toward lending to individuals are Lending Club and Prosper. Both of these sites allow you to lend your money to individuals in increments of $25 per loan which is important so you can lend to many people and diversify risk in the case of default.

On both sites the rate of return varies in relation to the risk of the borrower as determined by the platform. Interest rates range from around 5% for the least risky loans to above 20% for the most risky loans. The rates on the least risky loans are about double the rate of an online savings account but it is important to remember that you are taking on more risk.

When you invest in these loans it is a good idea to invest in a portfolio of at least 100 loans so that the default of any one loan won’t kill your returns for the year. Also if you invest more heavily in the riskier higher return loans you would want even more loans as the risk of default would be higher.

I have invested with both sites across varying risk levels and have around 300 loans. My average return has been between 6 and 7% per year which is a decent rate of return.

Including peer to peer loans in your portfolio also helps diversify your overall portfolio because these loans are not correlated with the stock market and are different than bonds. Having a portion of your portfolio allocated to these types of investments could reduce your portfolios volatility.

The takeaway is that an investor may want to look into adding peer to peer loans to their overall portfolio to increase returns and diversification.

Disclaimer

This article is for informational purposes only and should not be considered legal, accounting, financial, tax or investment advice. Please consult your own advisor.

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