How to Invest in Peer-to-Peer Lending

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Peer-to-peer (P2P) loan investments offer an alternative fixed income investment for investors seeking low volatility with high yielding, steady streams of income. These investments in unsecured consumer loans can be attractive because they include interest and principal payments with varying short-term maturity dates. When considering peer-to-peer loan investments, there are a number of different ways to approach this alternative fixed income asset class. Each investment approach has its own set of benefits and drawbacks and offers numerous investment options that allow investors to choose the best fit for their investment needs.

Self-Directed / DIY

Self-directed, do it yourself investing is a cornerstone of peer-to-peer lending. P2P investors have primarily been afforded direct access to peer-to-peer loans through an online lenders’ origination platform. Through self-directed investing, an individual or wealth manager makes investment selections according to his/her own strategy and works directly with the online loan originator. For example, an investor can choose to only buy loans within a given FICO range or to buy certain loan grades. This standardized investing process has been a mainstay in the industry and provides investors with basic investment options.

AdvantagesDisadvantages
  • Most individuals don’t have the expertise to build an investment strategy in consumer credit
  • Management of the account can become tedious
  • Individual must be in a peer-to-peer friendly state

Managed Accounts

As peer-to-peer loans have evolved and origination platforms have become more technologically advanced, expanded options such as managed accounts have become available to investors. Managed accounts allow an investor to invest in peer-to-peer loans through multiple loan originators on a managed account investment platform, managing all of their peer-to-peer loans through a single dashboard. With a managed account, all aspects of the portfolio including loan selection, execution, idle cash management, and portfolio rebalancing are managed by an expert team.

AdvantagesDisadvantages
  • Greater risk-adjusted return potential
  • Lower fees than a pooled vehicle
  • Portfolio balancing
  • Hands off experience
  • Available to non-accredited investors

Fund

Individuals can also invest in a pooled vehicle (fund) controlled by a portfolio manager who invests all assets of the fund. The fund is owned jointly by the investors (limited partners), who share pro-rata in its returns-on-investment. One example of an industry leading peer-to-peer investment fund is the Prime Meridian Income Fund.

AdvantagesDisadvantages
  • Potential for greater risk-adjusted return
  • More diversification as funds invest across platforms
  • Better liquidity features

The Bottom Line

The peer-to-peer loan asset class has significantly evolved since its beginning in 2005. As the asset class has evolved so has its trading mechanisms, offering expanded investment options for a wide range of investors. Through the category’s expanded investment options, investors now have greater access to this attractive alternative fixed income investment which offers low volatility and high yield returns from consumer loans. With low volatility and stable streams of income, peer-to-peer loan investments are a fixed income diversification option for any portfolio.

NSR Invest provides intelligent access to peer-to-peer marketplace lending through our two products families: private funds, and managed accounts. Our underwriting is sophisticated, smart, and uses the finest tools of the trade to expertly build and manage portfolios and is coupled with our state of the art technology to provide a direct connection to loan origination marketplaces, enabling you to make trades at institutional speed. Learn more by clicking here.