In part one of this article series we talked a bit about the history and development of peer-to-peer lending platforms in the U.S., especially Prosper and Lending Club. In this part two, we’ll talk a bit about the logistics of peer-to-peer lending investments and shed light on a few practical tips you can use starting today.
Who Is Allowed To Invest In Peer-to-Peer Lending?
Only an unfortunate few are not allowed to invest in peer-to-peer lending in the U.S.
As of the time of this writing, five out of fifty states don’t allow their citizens the freedom to invest with Lending Club. Specifically speaking, Iowa, Idaho, Maine, North Dakota, & Nebraska are the states that won’t allow it right now.
Investors that would like to work to build their investment portfolio through Prosper Marketplace are even more
Only 31 U.S. states are open for investing through Prosper. You’re in luck if you live in: Alaska,
California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois,
Louisiana, Maine, Michigan, Minnesota, Mississippi, Missouri, Montana, Nevada, New Hampshire, New York, Oregon,
Rhode Island, South Carolina, South Dakota, Utah, Vermont, Virginia, Washington, West Virginia, Wisconsin or
But even though you’re allowed to lend through Lending Club in more states than Prosper doesn’t mean that the company itself
will allow you to lend if you don’t meet their requirements. Lending Club has rather strict requirements for their lenders/investors.
In order to be approved to lend through Lending Club you must have a net worth of at least $250,000. If not that, you may qualify
to invest with an annual gross income of at least $70K combined with a net worth of at least $70K. Also, if you live in Kentucky or California you will have to abide by different requirements because of state law.
Thankfully, Prosper Marketplace is less of a hassle to begin investing in loans with, but they are not without
standards by any means.
How To Get Started With Investing In P2P Loans
So we’re going to assume that you are qualified to begin investing in loans on these growing and innovative p2p lending platforms.
Getting started with peer-to-peer lending can be quite a challenge for anyone, it truly is new ground for many
American investors. Prosper and Lending Club offer a wide variety of loans to invest in and many different ways for
you to invest your money. Without a doubt, there can be a frustrating learning curve in the beginning. But the same can be said about riding a bike when you were a kid. And regardless of the learning curve, it’s something you can truly benefit from.
The high returns and stability of platform makes p2p lending well worth a couple of weeks worth of effort learning the system.
Here are 7 proven tips to consider when you get started making p2p loans.
1. Diversify: Mama always said “Don’t put all of your eggs in one basket”, well nothing could be truer in regards to p2p lending. When I first began investing in p2p loans I had no idea what I was doing. I found a couple of loans that I thought were great opportunities and put the majority of my funds into these loans. That was a mistake that I’ll never duplicate and I don’t want you to walk that same path.
Both Prosper and Lending Club let you loan as little as $25 per loan note. I urge you to take full advantage of this, if you begin by loaning $1K then split that up into 40 different loans. The only way I’d recommend that you go over the normally recommended $25 is if you start lending with $2,500 or more. Even then, diversification is a must, but you can afford to put more money into each diversified note.
2. Automate Your Loans: Back in 2010 when I started investing with Lending Club you could sit at your computer and cherry pick the loans that you wanted. Things have changed. The big banks have entered the fray, they have technology and they aren’t afraid to use it. In fact, they ALWAYS use it and you probably should do the same if you don’t like getting left with scraps for investment opportunities. One of the up-and-coming platforms that levels the playing field for retail investors is Lending Robot. They have created an automated option for retail investors and it has been widely accepted in the p2p lending sector as a great investment tool for everyday investors that refuse to get pushed around by the banks.
3. Don’t Throw Caution To The Wind: Many of the higher risk loans have a tantalizingly high interest rate attached to them. But remember, that’s for good reason. Higher risk borrowers historically have a higher loan default rate. So a portfolio of p2p loans that are earning over 20% interest could easily end up returning less than 10% once all is said and done and all defaults have come to fruition. That being said, not all high risk loans are bad. Which is why you need to learn to filter and evaluate with both hard data and common sense.
4. Filter Through The Good & Bad Loans With Efficiency: You could be browsing loans all day long on Prosper and Lending Club and still have nothing narrowed down or targeted to invest your money in. This is why filtering loans is critically important. Both Lending Club and Prosper allow you to filter loan choices on their platforms. Lending Club’s filtering leaves much to be desired in comparison to Prosper’s easier and more advanced system. To make things easier with Lending Club you can download a CSV file of the loans available to you and filter them in Excel.
You could literally spend days tinkering with p2p filtering peer-to-peer lending stat websites. The most popular website for experienced investors is Nickel Steamroller, they give you an amazing amount of information and lending data to make calculated decisions when you choose loans.
5. Avoid Taxes If Possible: Unfortunately, interest earned on peer-to-peer loan investments don’t get the tax breaks that stock dividends get. Loans through Prosper and Lending Club are taxed at the standard income tax rate. This can put quite a dent into your investment returns but you can get around this cash grab by placing your investment in an IRA. Both Prosper and Lending Club offer investors a no-fee IRA if you invest at least 5K. In this way all of your interest can be accrued without tax penalties.