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Where should P2P newcomers begin?
This week’s TV coverage of peer to peer lending will spark off a whole new wave of interest in P2P platforms – or at least it will if the visitor stats on this website are a good barometer for public interest.
That got me thinking about the best way for newcomers to enter the market and begin investing. In essence, most platforms offer three entry routes to investment:
- The main auction site where new loans are listed
- An autobid function which lets you set investment criteria for the “system to follow” and bid on your behalf
- Some type of secondary market
For FundingKnight and other peer to business lenders who only offer loans to business, the secondary market typically lets investors sell loan parts (their investments) on to other investors – sometimes at a discount, sometimes at a premium.
If you like, P2P loan exchanges are a bit like the “buy it now” function on e-bay – instead of the thrill (and potential pain) of bidding in an auction, you can simply enter and exit the market, knowing exactly what you are buying and exactly what price you are paying.
That’s good for existing P2P investors because it creates liquidity – or access to cash. If you need access to the money you’ve invested in peer to peer lending, the loan exchange is your route to getting it, quickly. Some exchanges (FundingKnight is one example) even let you sell on part of an investment, which is far easier than having to sell more than you really need to.
But loan exchanges are also great for newbies. Just as my mother would be far more comfortable using “buy it now” on e-bay, newcomers might well be better off starting their P2P lending experience on the exchanges.
I think there are 3 main reasons:
You can start earning interest immediately
The loan parts listed on a loan exchange are live loans that are already up and running so as soon as you invest you start earning interest.
If you compare this to leaving your cash sat in an auction for days while you wait to find out if your bid has been successful, it starts to seem quite appealing – for you sanity as well as your financial health!
You can spread your investment more quickly
Most experienced investors agree that a sound P2P investment strategy relies on spreading your money out across as many loans as possible – diversification, in other words, just like any other investment strategy.
In the US, Lending Club regularly shout about their 800 club whose members – who have investments in at least 800 different loans – have never lost money. That’s a great proof of concept to support diversification, but how long does it take to bid in 800 auctions.
Using a loan exchange where you can quickly pick up new loan parts for your portfolio has the potential to be a far more productive use of your time.
You can be “in and out” quicker
As with the point about earning interest immediately, these loans are already running, giving investors the chance to buy up loan parts at an agreed rate of interest, knowing that there are only 6 months, for example, left to run on the loan.
Of course, a lot of the fun in peer to peer lending comes from the auctions. There are lots of people who enjoy playing the game and “winning” and that’s great – we need more participation in our financial system – but for the everyday saver who simply wants a better home for their money without having to sit in front of a computer each night, a loan exchange might well be a good idea.
This post was written by Hazel McHugh who works for FundingKnight, a peer to business lender who arranges crowdlending for businesses. It free to register at www.fundingknight.com and investing in fee free for lenders.
1. By not accepting the laughable rates available on Ratesetter’'s Monthly Access, now below 2%. You can still beat that with some banks and building societies if you are prepared to put some work into it. In fact I would recommend avoiding Ratesetter altogether until rates start to move upwards as their 1, 3 and 5 year offerings aren’t attractive at present.
2. Don’t chase low rates on Funding Circle auctions and ensure that when you do bid, you have carried out due diligence on the firm making the loan request.