All financial dealings involve a certain amount of risk, but if you want to obtain a decent return on your money then peer to peer lending can provide an excellent opportunity and you can personally minimize most of the risk through diversification. Peer to peer lending is easy to invest in but does carry the general risk that your investment is not FCIC insured as it would be in a bank, and it carries no bank guarantee.
Prosper is the largest peer to peer lending club in America but there is no guarantee that you will get your funds back. Aside from the uninsured risk the other risks can be evaluated in advance of investment to minimize risks.
Peer to peer lending displaces the middleman. There is no need to pay a commission to a third party to manage your portfolio, but instead you control your own investment directly. It gives you the opportunity to invest in something you believe in if you choose, or in a person close to your own community.
Borrowers post photographs of themselves, but a pretty picture is not a good reason to base an investment decision on and you should not be influenced by this. Then again if someone has the appearance of a seedy deadbeat and a tattoo on their forehead you may prefer to factor this into your decision.
You can best manage all risk by diversifying your lending portfolio which the system of lending in low increments of $25 allows. Instead of investing $100 in one loan, invest $25 in four loans, and you have immediately reduced your risk. With Prosper predicted yields are10.4%. Predictive estimated losses are posted beside each borrower depending on how they individually score as a risk, with the top AA borrowers representing a risk of just 0 – 1.99%.
The lower a borrower’s score the more risk of delinquency they pose. Conversely the higher their risk score, the higher the estimated yield. The cautious lender would be advised to diversify their lending across AA rated clients for the least risk.
Whether playing with low risk in mind or higher returns, each lender has the opportunity to directly contact the borrower, and evaluate their profile online. If you are investing expecting a return rather than helping people in need, do not fall for any sob stories as to why the funds are needed. If your intent is to help then give the money through charity. Borrowers should be judged on their ability and intent to repay rather than on the tales of the awful lives they live which will be improved by a loan. Put yourself in the shoes of a bank manager.
Diversifying investment across low risk borrowers is the safest way to minimize your own risk exposure. If you can afford the small risk of losing $25 then peer to peer lending schemes represent the easiest way for the small investor to receive high yields, whilst exercising control of your own investment.
Source: www.prosper.com/
Bank Canada