Formulating An Investment Strategy With Peer To Peer Loans

By Author: Scott Staudt
Total Articles: 91
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Most investors seek to build diversity, that is a mix of risk types, asset types and types of maturities into their investment strategy, and peer to peer loans makes this goal easy to achieve. This is due to the degree of fine tuning that can be achieved with peer to peer loans.

These are loans that the investor/lender makes directly to a borrower using the means of online auction sites. The primary goal of these sites is to make loans cheaper for borrowers and more profitable for lenders by eliminating the middle man.

But the consequent benefit is that the program has allowed an investor to design a loan portfolio that can be very closely tailored to meet the exact blend in terms of the risk/reward profile that he has targeted for his investment strategy.

The loans on a peer to peer lending site are arranged through a bid process, and borrowers bid by entering the rate they want to pay, and lenders bid by reviewing the loans available and offering an appropriate rate, based on the quality of the loan.

First, an investor can tailor his portfolio by picking the level of risk he is comfortable with ...
... for the loans he is granting. To do this, he reviews the thousands of loan listings and finds the ones that match his particular risk tolerance versus the return he is trying to achieve. Another benefit to investors of this loan process is that investors can even inject an investment goal into the portfolio that complements their investment strategy. There may be an investor who, in addition to trying to maximize his returns, would like to meet a social goal of advancing education- he could do this simply by choosing loans that have educational goals as their underlying purpose.

The mix can be further refined by picking a certain region of the country, either because the investor feels that the economy is strong there, or because he wants to help promote economic improvement in the area.

Diversification is one of the most important elements of peer to peer lending, adding this critical factor to an investment strategy on a number of levels: an added asset group (consumer loans) and an added debt obligation (personal debt versus government or corporate debt.

The portfolio of peer to peer loans can be tailored even more finely when the investor divides his loan exposure into a multitude of loans. An investor with $10,000 to lend is not restricted to lending the full sum to one borrower. What happens is that he can divide $10,000 by 100 (or more) and make 100 smaller loans to individual borrowers. The next benefit to a well thought out investment strategy is the amount of transparency that can be injected into the transactions. Today's investor is more attuned to actively managing his portfolio, after so many financial debacles have proven that investments were perhaps not targeted in the exact manners that investors had assumed they were.
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