Getting fully situated as a peer to peer lender can take some time. For one, a prospective investor has to learn the basics of how this entire thing works, how their cash is invested into worthy loans, and how these borrowers then pay these loans back with interest. Second, new investors have to become familiar with one of the two exchanges, getting to know Lending Club or Prosper and the way their websites work. Despite peer to peer lending being somewhat simple as an investment, the typical investor’s initial experience can contain a bit of a learning curve.
That said, once an investor is used to the process, the investment can take on a very different feel. It can almost become boring. Like learning how to drive a car, the initial period may be exciting or stressful, but eventually things settle down. Eventually, peer to peer lending can become kind of dull.
If investing is exciting, you’re doing it wrong.
This isn’t a bad thing. Quite the opposite; it’s an indicator of its inherent stability! There is this great maxim I read that said, “If investing is exciting, you’re doing it wrong.” Our investing, like vacuuming the house or visiting the dentist, should be typified by how important and uneventful it is.
6 Signs You’re a Seasoned Peer to Peer Lender
To illustrate this, here are six signs you have become acclimated to peer to peer lending:
#1. You have automated your investing
For beginner investors, many feel the need to pick their invested loans one by one, reading the descriptions and getting a feel for the people they will lend their money to. I did this myself, at first. But eventually lenders realize that reading each loan is a time consuming process. If they are going to diversify their account in over 200 loans, this would mean reading hundreds and hundreds of loan descriptions. And what makes a good description? Good spelling? A credit history with a low number of late payments?
Seasoned investors are often unaware of the specific loans they have invested in. Indeed, they have often set up Lending Club’s Automated Investing or Prosper’s Automated Quick Invest to place their available cash in more loans automatically, perhaps while using a filter. Seasoned investors typically trust the overall underwriting of the platforms to such a degree that automated investing makes a lot of sense and saves them a ton of time.
#2. You rarely check your investment
When investors start out, they sometimes feel the need to check on their investment every day. This is understandable, as many have never seen a loan payment before, or perhaps are curious what their initial return will be once payments start coming in. And most are curious to see if a borrower will default on his or her loan, particularly how this default will impact their overall return.
But eventually, an investor will experience the full gamut of peer to peer lending. They have loans go late but become current again. They have loans go late and eventually default. Their deposits are invested in loan after loan until they run out. Their ROI initially jumps really high, but eventually settles down as well.
Seasoned investors often have seen it all. With a return that largely remains unchanged from month to month, seasoned investors can go weeks without checking their accounts. For example, I did not check on my personal Prosper investment for over a month until my most recent portfolio update. Yet my ROI was unchanged from last quarter. And this account is only in month 12. Accounts don’t typically stabilize until 18 months have passed, so my most boring months are yet to come.
#3. Your overall return has settled between 5-10%
Early investors experience incredibly high returns. This is because their ROI typically reflects the interest rate of the loans they have invested in, since their loans have not had the chance to default. As the average interest rate on p2p loans is around 14-15%, many investors experience initial returns that mirror this rate.
However, defaults always come, and often in a flurry. That 15% return on month 2 begins to drop, and continues to do so each month for the next year and a half, often stabilizing around month 18 (read: The Return Curve in P2P Lending). New investors can find this process unnerving, especially at first when the drops are the greatest.
Seasoned investors generally don’t experience such precipitous declines in their ROI. Instead, the return on their diversified investment has come to mirror the platform investor average, settling between 5 and 10 percent as seen in the Lending Club graph above.
#4. You opened an IRA with Lending Club or Prosper
For prospective peer to peer investors, their initial trial investment is often some small trial amount in the safest available loans (read: How to Try P2P Lending with $2,000). This allows them to get a feel for peer to peer lending while having the lowest chance of losing money. Many new investors have a great experience with this initial account, going on to invest additional deposits into a wider variety of loan grades.
That said, seasoned investors have come to trust peer to peer lending to such a degree that they open a retirement account at Lending Club or Prosper (read: How to Retire Wealthy with a P2P IRA). These investors realize that p2p lending does not have a special tax rate, unlike capital gains. Considering many stand to lose a third of their investment to these taxes, a tax-incentivized Roth IRA makes a lot of sense, and these investors look forward to withdrawing their earnings tax-free when they turn 60.
#5. You have chosen to take on more risk
Beginner investors can feel uncertainty toward this asset class. After all, investments like stocks and bonds have been around for some time. But peer to peer lending has been around for less than a decade. To combat this lack of familiarity, early investors often choose to fund the safest A-grade or AA-grade loans they can find. Some, like myself, might feel safe enough to make their early investments in C-grade loans, but most stick to the As and Bs.
Seasoned investors, on the other hand, have often shifted to embrace more risk, filling their portfolio with more of the C through G-grade loans. My favorite example of this is Jack’s Reader Story, where he describes his overall return climbing dramatically when he changed his investing strategy from safer to riskier:
“I am happy with my returns since I changed my risk tolerance from ultra-conservative to somewhat aggressive. At that time, we were coming off of the 2008 financial crisis, so I only invested in A and B-grade loans.
After one year, I switched to loan grades of C and below, since it seemed people were getting better returns in these riskier loans without a large increase in defaults. On Lending Club, I went from an 8% to almost a 10% return in the past 18 months by switching to this strategy.”
This does not mean it is right for everyone to take on lots of risk. Many investors, particularly those later on in their lives, experience adequate returns in the safer grades. However, it is quite common for investors to take on more risk as p2p lending becomes more familiar to them.
#6. You’ve given up trying to convince your friends
Many new investors can’t believe how novel and lucrative peer to peer lending is. They are amazed by how simple it feels when compared to a dizzy investment like the stock market. They love its inherent stability and the control it offers them over their own retirement account. These investors sometimes become huge proponents of peer to peer lending. They may talk about it to their friends and family, giving solid reasons why they should adopt it as well.
Seasoned investors have often tried and given up on this errand. While perhaps influencing a friend or two, most investors have realized how difficult it is to change people’s habits, and have instead become content with their own returns. They may hope for p2p lending to become a national trend, influencing their community in ways they themselves are unable to, but until then their investing is largely done independent of their social circle.
P2P Lending: A Cutting-Edge, Lucrative, & Uneventful Investment
Our personal finances provide our lives with a frame, a frame upon which we can fill with people and experiences that make life worth living. This frame is really important. It has to be strong and dependable throughout all of life’s twists and turns. But in the end, it’s just the frame. It is boring to look at, and even more boring to live for.
Peer to peer lending is, at its best, part of that frame. It contains refreshing potential, offering us a stable investment if we do it properly, and this can be seen in the solid yield it continues to offer us. That said, peer to peer lending is largely uneventful once enough time has passed. There are situations where this could change (an increase in unemployment, etc), but largely our experience as investors has been the same year by year.
This uneventful stability is just another indicator of peer to peer lending’s inherent quality, and may be what eventually convinces our country to adopt it as a widespread practice. I believe most investing professionals, including those managing hundreds of employee retirement plans, will be more eager to jump into this asset class once it has had an uneventful 5-10% return for 8-10 years.
What do you think? Did I miss any?
[image credit: Randy Pertiet “Cowboy # 3” CC-BY 2.0]