How You Can Be The Banker and Make Money
Have you ever played monopoly and became the banker? Peer lending is a platform that allows you to do this in real life. Sites like Prosper and Lending Club allow you to pick and decide who you want to give a loan to. The minimum investment is only $25 per loan and you can earn up to 9% if you are well diversified but if you have a huge risk tolerance you could earn 10.6%. If you have a sense of good character you could even earn up 27% by putting all of your lending eggs in one basket. This is not a good strategy though.
See the strategies on how to become the best peer lender.
There are factors that can be used to pick loans that can produce higher returns than the average across the platforms. I recently interviewed one investor that turned early losses to an five-year annualized return of 14% and a gain of $9,000 by changing his strategy for picking loans.Don’t get me wrong, you absolutely need to diversify your portfolio across many loans. Putting all your money into a few loans risks chaos if just one loan defaults. Contrary to what some would say, you can achieve all the diversification you need with about 100 loans. While diversified, this still gives you the opportunity to pick loans based on criteria that can lead to higher returns.
Peer lending can be as bad as gambling in Vegas or just throwing your money by guessing what stock is going to go up. You need a strategy with everything you do regarding your investments. Diversification is the biggest strategy to minimize risk. Double digit returns are great but you need to offset that default risk with some steady loans. The rating for loans looks a lot like corporate bonds or nation sovereignty ratings except instead of AAA there is only AA in peer lending all the way down to HR which is high risk loans.
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About Shaun Archer Tatum Shaun works in corporate finance in New York City. He has done financial consulting for several start-ups and has worked at several Fortune 500 companies. He has contributed several finance/investing articles on Seeking Alpha which have been published on Yahoo! Finance.