Rich people lending money through peer to peer companies

Rich people willing to lend money has given rise to peer to peer lending, in a nutshell peer to peer lending is a place which connects borrowers who want a cheaper loan with investors who want a better return compared to deposit accounts, you can take a P2P loan for debt consolidation, home improvements or even a deposit on your property.

In this Forum Post we take a closer look at peer to peer lending from both sides as an investor and a borrower, we take a deeper look into one of the leading P2P sites Prosper.com and consider whether this service will continue to grow.

What is Peer to Peer Lending for Borrowers?

Peer to peer lending companies like Prosper.com & Lendingclub.com connect investors who want a better APR return on their investments with borrowers who have been refused credit or want a better more competitive loan based on their credit score.

If you’re a borrower then you can sign up, once you’ve signed up you will be asked to undergo a credit check to reveal your credit history, this will determine what sort of credit ratings or score you’ll get with the account.

The best ratings is AA which basically means that you have excellent or good credit and are creditworthy, on the other hand if you have a E credit ratings (Bad Credit Ratings) you will be able to borrow but you’ll get a much higher rate.

What is Peer to Peer Lending for Investors?

Rich people willing to lend money; can also sign up to peer to peer lending sites like prosper.com and lendingclub.com; As interest rates are very low investors are looking to make more money using alternative investment methods.

With Peer to peer lending investors can lend money to borrowers and get a better return compared to the bank, the investor has more control over who they lend to and effectively become a bank account. At the time of writing this article the return an investor receives is 5.7% for a AA rated loan after the chances of loss rate is taken into account.

Is Peer to Peer Lending Safe?

If you belong to the group of rich people willing to lend money and want to make a decent return on peer to peer lending sites you need to put an emphasis on risk management, there are a lot of rich investors who have made fortunes from Prosper.com and Lendingclub.com because of effective risk management. The investors who fail to make money or lose significant amounts of money take on too much risk and overlook diversifying.

Before you invest any money in peer to peer lending you need to consider your tolerance to risk, if your risk averse then a large portion of your portfolio should be used to administer AA loans, if on the other hand you want to make more money you can devote a large portion of your portfolio to E Rated loans where the returns are higher. Here are three portfolios you could consider before you invest in P2P Lending.

Cautious Investor



Balanced Investor



Aggressive Investor



By choosing the right portfolio your attitude to risk will be congruent to your expectations, you’ll be prepared for any nasty shocks and your diversification should enable you to survive any major setbacks so you can carry on.

If you’re a borrower your loan rate will depend on your credit score, it’s unlikely that you’ll be refused credit from a site like Prosper.com or Lendingclub.com however you’ll have to pay a higher APR, as you borrow more money your ratings will improve and you’ll be able to borrow more money at cheaper rates as you develop an aptitude to pay back borrowed money. Some of the things that you can get a loan for using peer to peer sites include: If you're wondering how these peer to peer lending sites work check out the links below.





What are the Risks of Peer to Peer Lending?

The biggest risk to an investor is when a borrower fails to pay back their loans; if you had invested all your money by lending it to one borrower and they default on the loan you’ll lose all your money, if however you spread your investment over 50 borrowers then when one borrower defaults the effect are not as severe.

It’s very important to diversify your portfolio and avoid putting all your eggs in one basket. If you’ve managed to pick the right portfolio that is congruent to your attitude to risk and then diversify tour money there is no reason why you can’t make an effective return.

If you’re a cautious investor and want to invest $10,000 then you could spread that money between the AA to E Rated loans, you could then further split your money between several borrowers within that particular risk category to eliminate your risk. Here is a screenshot of the Loss Rates. Also here are links to the fees and loan rates.



How Much is a Peer to Peer Lending Loan?

If you’re a borrower the rate at which you can borrow will depend on your credit score, if you have excellent credit then you’ll be able to get a loan very quickly at a cheaper rate (5.7%) compared to what a bank can offer you. If you’ve got bad credit then you will get a loan at a very high rate (20 to 30%) however this will be much lower than a payday loan or a car title loan, another advantage is it’s an unsecured loan so there’s less risk of losing your car, home or valuable.

If you start out with a bad credit score and can pay your loan back on time your ratings will improve which means that next time you take a loan you’ll be able to get more money at a lower APR, it’s much quicker to build credit using a peer to peer lending company compared to a taking the normal route with credit reference agencies.

What Return Can I Get With Peer to Peer Investing?
Strategies for Peer to Peer Lending

The return you can make as an investor depends on your attitude to risk; if you want to make high returns then you’ll have to take higher risk. There are several risk profilers that you can use that are readily available on the internet to check your attitude to risk; if you can identify your risk properly you have a good chance of long term success.

The best strategy for peer to peer lending is to first of all pick a portfolio as mentioned above according to your level of risk. You then start investing in the portfolio and when you get monthly interest payments you can reinvest this back into the portfolio, the compounding effect should increase your income very quickly, if you can compound as well as invest more of your money or other people’s money you could eventually make significant gains. Here are some great blogs of investors making money and offering useful information if you're just about to start out.

How Can I Diversify My Peer to Peer Lending Portfolio?

In my opinion after extensive research the best peer to peer lending sites Prosper.com and Lendingclub.com. You can implement your own portfolio using these two sites, you then have even further control in diversifying your money between borrowers. The first level of diversification is choosing between credit ratings; your second level of diversification is investing in different loans in the same credit ratings categories.

Is Peer to Peer Lending a Reliable Investment?

Peer to peer lending will last as long as people find it difficult to get credit and investors look for a better rate of return. At current levels of interest the demand for these investments is high which is why peer to peer sites are growing at a phenomenal rate, if however interest rates begin to rise and bank lending loosens up P2P companies will lose investors and borrowers. At the moment P2P investing and borrowing is very attractive to rich people willing to lend money, but as interest rates rise the success of these companies may fall.

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