This post is the second part to an on-going series devoted to peer to peer (P2P) lending and loan strategy. Different strategies for lenders to obtain good returns and minimize loss will be discussed over the series. I am not a financial advisor, the strategies discussed here are just what I personally do every time I evaluate a new peer to peer loan. So far, at a slow pace I have seen good results.
Investing in peer to peer loans has been growing in popularity over the past few years and offers lenders and borrowers an opportunity to earn good returns and secure reasonable rates on loans.
Although P2P lending has the potential to be a good investment for an individual’s portfolio, it is an investment and does carry a certain amount of risk. As an investor it is important to do your due diligence and attempt to avert unnecessary risk when possible.
If you haven’t already, read my initial post of this series on my p2p lending strategy that discusses my criteria concerning previous loans through Prosper.
Ok, now that that is out of the way let’s move on to step #2 of my strategy.
Checking out the size of the loan.
On Prosper, the lowest amount you can get a loan for is $2,000. For lenders, it would be great if every loan that was listed was for only $2,000. That would definitely take a lot of the pressure off knowing that all the loans you are invested in were for only small amounts.
Why do I say this?
Put yourself in the shoes of the borrower. Obviously some kind of situation has arisen that you cannot attend to with your cash reserves. Therefore, you seek out a loan.
If the debt burden was very small, it may be an inconvenience, but you would know that eventually you will pay the loan back. You know there is a light at the end of the tunnel and essentially it “won’t be too bad”.
Now on the other hand, lets assume this loan is for quite a large sum. Your frame of thought might change. If you cannot see the light at the end of the tunnel, maybe you begin to think of other options that do not include paying back this rather large loan.
This is the main point.
Borrowers that ask for large loans may find themselves in these type of situation more often than borrowers that ask for smaller loans. Now this is just my own personal opinion, but I would think most people would pay back a $2,000 loan before choosing an option such as bankruptcy or something else.
But wait, Prosper loans only go to $25,000!
I know, and I wouldn’t imagine anyone would want to go bankrupt over $25,000, but I still cannot help feeling more secure loaning to individuals who are requesting a smaller amount. If I try and put myself in the borrowers shoes, I see myself not being as worried about a $2,000 debt rather than a $25,00 debt.
What do you think?
Do you invest in peer to peer loans?
Let me know!
I use Prosper to invest in peer to peer loans. If you would like to begin investing, just head over to Prosper.com and sign up. This link is an affiliate link. If you use this link to begin investing in Prosper I will receive compensation, thank you. I will use all income generated from this link to reinvest into Prosper, and will document it in my monthly experiment reports. As always, if you have any questions please feel free to contact me.