Many investors considering peer to peer lending are curious as to how much can you make peer to peer lending. While the answer varies based on your risk tolerance, results provided by Lending Club indicated that investors can expect to earn 5% to 7% on average. Anecdotal evidence (stories from investors) shows that returns of 10% to 12% may be possible for skilled investors. Again, it is important to note that investors have vastly different experiences with some earning little to nothing from their investments. In general, professional help in not really available although Peer Loan Advisor has an excellent service that provides research and analysis that will help individuals reduce the default rate of their peer to peer lending portfolios.
You should ask yourself: How does this potential risk and return profile fit into my portfolio? You see, just as your peer loans should be diversified, your investment portfolio as a whole should be diversified as well. It may include stocks, bonds, real estate, gold and other common investment vehicles. How you weight each component is up to you based on your goals and needs. Your overall risk tolerance and rate of return goals will influence the specific investments that you select for your portfolio. These are important decisions are they should not be made without careful consideration of the alternatives and pitfalls involved.
What percentage of your portfolio should you dedicate to peer to peer lending? It is hard to say but you should consider taking a portion of the money you have invested in bonds or fixed income mutual funds and dedicating it to peer lending. It is probably not wise to use peer lending for the entire fixed income portion of your portfolio again because diversification of investments is important on all levels.
Many investors increase their peer lending returns by choosing higher risk loans that pay higher interest rates. While this strategy can work it is important to know how to select quality loans. There are many factors and variables to look at so you need to decide which criteria are important and indicative of potential for loan payoff in full. Many bloggers write about their personal experiences and there is some good information available online, however, they are not always accurate in their assumptions which can result in more charge offs than expected.
Forbes magazine has provided some tips for their readers who choose this type of investment. They advise that you invest at least $5,000. They also suggest that spread your spread this amount over 200 different loans by investing the minimum of $25. That may seem like a lot of loans and a lot of work but that is what it takes to truly diversify your portfolio. They also suggest that you use P2P lending as part of your Individual Retirement Account. This is a smart way to save on taxes because all of the interest you earn is taxable in the year you receive it. Also, there is some work involved in determining how much you owe. With an IRA you completely avoid all taxes and effort until you withdrawal the money in the future.