How much should I invest in peer to peer lending?
I get this question every week and like many investment related questions, the answer is it depends. Remember, everyone's financial situation is different and I'm not a financial advisor.....
While the real answer is it depends, there are some things you should look for when deciding how much to invest.
P2P Lending is a Good Substitute for Bonds
One of the long-running themes of this blog is that p2p lending is better than bonds and a good substitute for them. Both are fixed-income investments and comparable to each other. Each of the 7 p2p lending options for retail investors that I go over in my book P2P Investing 101: Why the Smart Money Invests in Peer to Peer Loans is more transparent about its offerings, objectives, returns, and costs than bonds or bond mutual funds.
Some like this factor alone as the reason to try peer to peer lending instead of investing in bonds. You have a better idea of what you are investing in.
It makes sense to take at least some, if not most, of your investment allocation that you'd put in bonds and put them into p2p loans.......AFTER you do your research.
Control Over Your Fixed Income Investment
You get much more control over your investment choices when you select the loans you want to invest in and why. This is a 'classic look' or the old view of an old Prosper loan ( at no cost to you, I make a small fee if you click that link and start investing on Prosper). Check out all the information you get in each listing.
In the Listing Summary section, you see some information you can filter like State, interest rate or Prosper rating, which is an internal rating system for their loans. For instance, maybe you favor the midwestern states more because you think people there are naturally a little more conservative with your finances. You can filter for that.
In the Borrower's Credit Profile section, you see information from Credit Score (now listed as TU FICO or FICO credit score from the TransUnion credit bureau), # of credit lines, # of credit inquiries, delinquencies, and many other factors. I've covered many of these factors back in my early posts from 2013-15.
The point is you can decide what is important to you, control the risk you take based on these priorities, and then factor those into your loan filters and choose your loans accordingly.
Control Your Investment Across Platforms
In my book, I cover 7 platforms retail investors can use for investment in p2p loans. They break down into 3 categories: Consumer (which is Lending Club and Prosper), Real Estate, Business Lending.
If you like the choices or investments across multiple assets or parts of the economy you get from a bond fund, I understand. You can replicate that with a p2p loan portfolio. You can choose to invest in LC or Prosper or both with some of your funds, some into one of the 4 Real Estate platforms or the 1 business loan platform available.
This way, instead of being forced to own a piece of thousands of bonds, you can choose to diversify some of your investment across the different investor categories, with less risk, higher potential returns, and greater transparency.
So how much should you invest in p2p lending? As much as you would in bonds, understanding you need to have money to invest in other assets like stocks, real estate, gold, or cryptocurrency for a diversified portfolio.