5 Tips for Better Success when Investing in P2P Loans

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p2ploansYears ago, I received free money to invest in P2P loans for review purposes. I would get to keep the money, and I could write about my experience with P2P investing. I decided to accept the assignment, since the money was free, and I could invest it how I wanted. Not only would I get the money, I figured, but I would also benefit from the returns (if any) generated by the money.

I had a good experience, and began investing my own money. Now, a few years later, I still have money invested in P2P loans. It’s a relatively small portion of my overall portfolio, but I’ve seen reasonable returns. And, during the downturn, my annualized returns beat the stock market.

If you are interested in P2P loans as an investment, here are 5 tips to help you improve your chances of success:

1. Start Small

Most of the time, you can start with as little as $25. If you are worried about how things are going, and if you want to get the hang of things before you commit more, you can start small. Only invest money you can afford to lose. While there is a reasonably solid track record for payoff, there is still the chance of default.

. Research the Notes

You are more likely to have success in picking notes if you do your homework ahead of time. Read up on the reason the borrower wants the loan, and determine whether or not the story resonates with you — and rings true. It’s one thing to help fund a relatively small loan for someone to start a business, and quite another to expect someone with an already-poor track record to pay off a $25,000 debt consolidation loan.

3. Don’t Assume A Credit is a Slam Dunk

When researching notes, you will want to look at credit rating. Most P2P lenders rate borrowers on a letter scale, with A credit considered the best. However, A credit isn’t everything. In fact, the one charge off I have on my P2P loans is from someone with A credit. You can get a better potential return — and possibly better pay off results — when you look those with B, C, and D credit. Just remember to pay attention to the story behind the borrower and do other research first.

[Free Resource: Check your free credit report and score]

4. Reinvest Your Returns

When borrowers start repaying their loans, you will receive payment. When that happens, consider reinvesting your money immediately. Don’t let it sit idle. As soon as you have $25 available to you, fund a new note that will help your portfolio. It can keep the ball rolling.

5. Consider Holding P2P Notes in Your IRA

It’s possible to hold P2P notes in your IRA. Some of the P2P lending sites make it easy by offering funds composed of notes on their sites. And, if your IRA custodian will let you hold notes in another IRA, that’s a possibility as well. Your returns will be tax-advantaged, and that can make them even more effective.

P2P loans are becoming more mainstream, and you can potentially benefit when you consider investing in your peers.

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Miranda is a freelance writer and professional blogger specializing in financial topics. Her work has appeared in numerous media, online and offline. Her blog is Planting Money Seeds.