Determining the best peer-to-peer lending for investors is not a simple equation. A lot must go into deciding whether to become a peer investor, and we will cover as much of it as we can here.
Best Peer-to-Peer Lending for Investors: Returns
The best peer-to-peer lending for investors, in terms of a percentage return, is easy. Instead of figuring out where you hope to be with your portfolio and hoping an external market leads you there, peer-to-peer lending returns are what they are – the percentage the borrower is being charged minus any rate the best peer-to-peer lending for investors. This allows you to figure out with some certainty, based on previous default histories, a range in which best peer-to-peer lending for investors strategy is best.
This relative certainty opens up peer-to-peer loans to a group of investors who trade, waiting until they are paid back to have some confidence about their returns. Those who have extra money now but need to know it will be free whenever they need it might choose another option, such as stocks.
Best Peer-to-Peer Lending for Investors: Platforms
The best source of information about peer-to-peer lending returns will be the website you choose to do your lending. They should be able to accurately tell you the recovery history in your selected risk category. They may even be able to tell you the history of returns within even more specific categories, such as why the person took out the loan, aspects of their financial background or the loan length. Of course, this does not guarantee a certain exact return on any loan you choose to fund. Still, it can help a lot, especially if you have decided to fund a lot of loans, each with a little money – this spreads the risk and factors out the possibility that one or two people might default.
Best Peer-to-Peer Lending for Investors: Time Frame
The usual length of peer-to-peer loans is between three and five years. Often, the shorter the period until maturity, the higher the risk because this puts pressure on the borrower in the form of higher payments (though they also usually get a lower rate). Projects that take longer often have a higher overall payback because a higher rate is charged, and the chances of default may be lower.
Best Peer-to-Peer Lending for Investors: Strategy
While external factors such as the state of the economy may also affect the best peer-to-peer lending for investors strategy, those factors will likely affect almost any investment. Thus, the most important steps to focus on are using historical data to research your best peer-to-peer lending for investors strategy over time and making decisions about the length of the investments that balance interest rates with financial flexibility.
As an investor, you want the highest return on your investment in P2P lending. As with any other investment, the higher the risk, the higher the potential return. In this case, you will get two lines of information.
Information About the Investor
You will get information about the investor. What is their credit score? How long have they been at their current job, do they own their home, how much revolving credit they have out, etc.? This information can help you decide whether to invest in the person or group. Â And, of course, the higher their risk profile, the more interest they will have to pay, so the higher the potential return. Then again, the higher their risk profile, the more likely they will default, and your returns may be lessened or stopped.
Purpose of the Loan
You will also get information about the purpose of the loan. They may be consolidating higher-interest debt, using the money for home improvement, using it for a family celebration such as a wedding, or starting a business. Whatever the purpose, you will need to consider the inherent risk, and again, you may get higher peer-to-peer lending rates for higher risk purposes and a higher risk of default. The best peer-to-peer lending for investors strategy will vary depending on the borrower and purpose.
Best Peer-to-Peer Lending for Investors: Rates
Of course, the first question that any potential investor might ask is the interest rate of return. This is not a question we can specifically answer here, given that all person-to-person loans are unique, and the overall interest rate environment changes all the time. However, we can go over a few factors in the peer-to-peer loan interest rate calculation:
1. Of course, prevailing rates are the most critical factor. As with other types of lending, peer-to-peer loans fluctuate about the rates offered depending on prevailing interest rates.
2. What is the risk involved in the project itself? If the project is risky and carries a higher-than-usual likelihood of default, the investor must hedge by charging a higher rate. In these P2P lending situations, the project may define the rate, though often, the person’s creditworthiness for funding may trump that factor.
3. What is the overall risk in the economic environment? In a poor economy for business, a small business loan may have a higher rate because of the increased risk of default, especially when the nature of the project is risky to the economy.
4. How much is the loan as compared to other financing? A loan that has to cover an entire project may have a higher rate than a loan that subsidizes existing stable money since the latter carries more likelihood of the project being completed.
Caveats with Peer-to-Peer Lending for Investors
One aspect of peer-to-peer lending returns that you need to be aware of is that there is a specified length in any person-to-person loan agreement. In other words, you’ll get your return over time, and then you can decide what to do. With other investments, such as stocks or bonds, you can cash out at any time – these investments do not “mature” and have an end date like peer-to-peer loans do.
Then, some investments mature, including CDs and commodity contracts, but most people invest their money in non-fixed-time investments so they can withdraw at any time. This is an essential factor in determining your best peer-to-peer lending strategy for investors.
Best Peer-to-Peer Lending for Investors: Time Horizons
Of course, the fact that you cannot immediately get your money out does not in any way affect your peer-to-peer lending returns – as people are paying back their loans, you are making the return that equals the interest rate they were changed, minus any defaults, minus any fees the website charges. If you do not reinvest the money, you can take it out as you go, making a return and then deciding what to do with it. Of course, many people reinvest those returns in new peer-to-peer loans, and many websites allow for that to be done automatically – a convenience because otherwise, you will have money frequently freed up, and you’ll have to remember to go back to the site.
Bottom line: You need to carefully assess when you will need any significant portion of the money you have invested in peer-to-peer lending and ensure you do not reinvest for a certain period so that that money is freed up when you need it.
These two factors will determine how high the rate will be. At that point, you have to balance the risk/reward of this type of investment.
Conclusions and Our Services
Best of luck if you are turning to P2P loans to round out your portfolio. we specifically cover crowdfunding for real estate, which can include peer-to-peer investing elsewhere. We hope this exploration of the best peer-to-peer lending for investors was helpful. Our services can help connect you to the best platform for your investment goals, so feel free to contact us any time.
