6 Important Facts Every Peer Investor Should Know
Are you new to peer lending or uncertain about the details? Below are some things that may surprise you.
- Investing in more notes of differing loans reduces risk.
- This is due to the power of diversification. A well diversified portfolio decreases the effect that any one note has on the overall return.
- An F grade loan is not necessarily riskier than an A grade loan.
- This has to do with how each Marketplace platform prices notes, as well as calculating when a note will default.
- In general, an F-grade loan has a higher likelihood of being charged off than an A-grade loan. However, the timing of the default is important in risk assessment as well. For example, a 36 month 25% interest rate F-grade loan only needs to survive for 24.5 months before the the investment breaks even. A 36 month A-grade loan with a 6% interest rate would need to survive for 33.2 months in order for the investment to break even.
- Defaults will happen.
- But having a note default is not catastrophic to portfolio returns. A return is based on the risk involved.
- The timing of loan defaults is important.
- A loan defaulting within the first few payments is worse than one defaulting after a year or close to the end term. This is due to you receiving more monthly payments and thus, more cash.
- Prepayment or early repayment happens quite often.
- If a loan prepays you lose out on future interest payments. In addition, the principal balance will need to be reinvested sooner, and in this interim time before reinvestment your cash is not accruing interest and is at risk of being reinvested at a lower interest rate. LendingRobot continually reinvests available cash in order to minimize cash drag (the cost of idle cash).
- Investing in peer loans can help achieve both short and long term investment goals.
- Peer Lending can help investors park cash into higher yielding investments
- There are no setup fees and you can invest as little as $25.
- Lending Club and Prosper will only charge you the investor fee of 1% after a loan starts to make payments to you. When selling on the FolioFN secondary market for Lending Club or Prosper, FolioFN will collect 1% fees equal to the note’s sales price but there is no fee for purchasing on the secondary market.
- The Marketplaces are getting better at pricing risk.
- This makes it more difficult for individual investors to outsmart a platform’s underwriting and generate alpha without taking more risk.
- Automated, machine-learned solutions are able to comb through historical data in ways that are exceedingly difficult for humans. This allows computers to find patterns in data that may help in finding trading opportunities.
Have questions or comments about this post? Let us know below, there is always more to be said about peer lending!
- Vanessa Hoying
- January 14, 2016
- 0 Comment