Peer-to-peer lending is gaining a momentum among investors. P2P loans have less volatility, a low correlation, and yield much higher returns compared to other fixed-yield investments. Median adjusted returns average 7% on a 36-month loan.
The sector is also very easy to enter. An investor can set up a profile in less than a day and invest as little as $25 per loan. Once invested in a loan, investors usually start receiving payments within 30 days.
However, the unsecured nature of the market means investors must be well aware of its dos and don’ts. So I discussed marketplace lending (MPL), another term for P2P lending, with several industry experts and outlined a few key factors to success in this industry.
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The P2P lending nature means that you must build a portfolio of hundreds of loans where each loan is a fraction of the total portfolio. And this is not an asset basket into which you put too many of your investment eggs.
Lending Club, Prosper, and Funding Circle have all released statistics that show diversified portfolios give the greatest return and minimize risk.
Diversification at Lending Club:
Diversification at Funding Circle:
Prosper also has statistics that show since July 2009, every portfolio of 100 notes or more has had positive returns.
The low minimum investment at these services makes diversification easy. However, loan selection takes time, and speed is key to getting the best loans.
With the recent influx of institutional money, MPL has become much more competitive. The best-quality loans can be snapped up within minutes of being posted. This is why investors must use third-party marketplace tools, which we detail next.
Tools for Success
The fast pace of loan purchases on platforms requires that investors use automated filtering and selection tools.
NSRInvest.com is a registered investment advisor that offers managed accounts to MPL investors. Investors can link their Lending Club, Prosper, and Funding Circle accounts to the website and have NSR experts invest for them based on their loan selection criteria. Loan filtering can help investors consistently outperform the market. Based on back testing from NSR, the most effective filters are: loan grade, credit inquiries in the last six months, and loan purpose.
Although default rates are higher on grades D–G at Lending Club, and grades D–HR at Prosper, the ROI is higher too. Loan filtering can mean successful investing in these lower grades.
This table shows how filtering for the number of credit inquiries in the last six months can affect returns on D- to HR-graded loans on Prosper.
In the next table, you see how the annual income filter can affect returns on D- to HR-rated loans on Prosper.
NSR also offers investors access to liquidity with automated secondary-market trading plus detailed loan selection algorithms. Users pay a fee of between 0.45% and 0.60% of the total value of all notes purchased on NSR Invest (excluding charged-off loans) plus your average daily idle cash balance during the billing period. Depending on the strategy selected, NSR users outperform the market by as much as 2.2% (average is 1.7%).
NSR recently partnered with MonJa, an MPL investment tool that provides loan selection strategies and portfolio analytics. The MonJa platform offers investors a user-friendly interface that breaks down portfolios to explain performance and understand what is driving returns. Its analytics can be used for back testing so investors can enhance their current investment strategy based on past performance.
Another great tool is LendingRobot, a registered investment advisor offering fully automated MPL investing for individuals. Investors can link their Lending Club, Prosper, and Funding Circle accounts to the website. Users then select from several criteria, which determines their individual strategy and have LendingRobot execute the investments.
LendingRobot is extremely fast, executing investments in less than one second after loans have been listed on a platform. The first $5,000 is managed for free. After that, users pay a 0.45% monthly fee on assets under management.
BlueVestment and PeerCube are two other automated MPL investing platforms that can help users. Both platforms perform the same function as LendingRobot.
Free Report Reveals: How to Join the P2P Lending Revolution and Earn Yields of as Much as 10.39%
The P2P lending technology is turning the traditional banking industry upside down. With almost no effort and risk, you can join the revolution in minutes and earn yields that are 350%, even 1000% higher than available from other yield instruments.