So by this stage maybe you have put some money in some peer to peer loans. Once you do, you have a P2P loan portfolio that now has to be managed. How d owe manage this? For better or for worse, there's alot of information we can use from the investment world in the management of our portfolios. According to Standards and Poor's, the S&P behind the S&P 500 Index, since 1926, Dividends make up 44% of the total return on the index. This is a huge number and its also why you can have years where it only earns 2% or 3% but investors still make good money. Why?
Think of it this way, if you put $1000 into the index and it earns a 5% dividend, we now have $1050 ($1000*5%). Now if we invest that and it only makes 2%, instead of the original 2% on original $1000 or $1020, we have 2% on our $1000 plus our reinvested dividends of $50 meaning we have now made $1071. This is a difference that seems small but is huge when it's compounded over time. Compound interest is what multiplies returns on investment.
Dividends in P2P Loans?
Can we take advantage of reinvested dividends and compound interest in our P2P loan portfolio? ABSOLUTELY!!
Ok how do we do that? At both Prosper.com and Lending Club, the minimum investment is $25 into a loan. Despite the quality reporting we get from these platforms, my idea of fun is not looking over a zillion loans for $25 each to see if they all paid or not each month. However, it is important to have a strategy in place.
1) Every $100 in cash earned (Principal+Interest paid back) from my Prosper loans, I immediately deploy all $100 into 1 additional loan
I chose $100 for a couple reasons including that its a more manageable number with fewer loans than $25, that it takes a couple months of payments to reach it, and its an amount that is meaningful to put into a loan especially since my 6 existing Prosper loans all started with equal contributions of $250 ($250*6=$1500 invested). $100 is also meaningful for portfolio purposes as it is equal to about 6.67% of my original $1500 invested so if that 6% makes 6%, and so on and so on, we have our compounding working for us.
2) I use my same filters and credit based methodology to choose this loan that I used for the loans already selected and invested in.
As you saw in the report, I have a split between B loans and C loans based on Prosper.com's rating system. I am comfortable with that risk. You may not be and should understand where your tolerance for risk is in the loans you select to invest in with your own money.
3) I buy right away preferably for a shorter term
Why a shorter term? This is just a personal preference of wanting to turn over my interest into more loans more frequently. It's not better than putting it into a 5 yr loan or worse, just a personal preference of mine.
That's all there is to it. It's pretty simple. In fact, I just hit $100 in the cash portion of my account so I will be putting my money into this loan in order to grow my Interest earned from my existing portfolio.
I like this loan for the following reasons:
1) While I dont have any A rated loans, I like the idea of an A loan for 12.34%
2) I like the credit score. Its Excellent at 740-759
3) Debt to Income ratio is low at 11%. This is a guy who is living within his means.
4) Homeowner and makes a good salary
5) Long solid credit history with first credit line opened in 2000
So for these reasons, I picked up this loan (assuming it gets up to the 70% minimum to fund) within the next 2 days. What do you think? Do you like this loan? If so, why? If not, also why? I'd love to hear your opinions.