3 Tips to Help You Get the Most out of Peer-to-Peer Lending Investments
Peer-to-peer lending provides a unique opportunity for anyone with financial capital to help out someone who needs money—and earn interest on the loan they provide. While some investors are initially attracted to peer-to-peer lending because of its personal nature, most people who are heavily involved in this form of investment do it to make money. After all, that's the point of most investments. If you're exploring or already involved in peer-to-peer lending, here are some tips to help you maximize your returns.
Invest Through Your IRA
For investors in the United States, the individual retirement account (IRA) is an invaluable savings plan. As CNN Money explains, an IRA is akin to a savings account, but it has major tax advantages. Your specific tax benefits will depend on the type of IRA you qualify for (there are traditional IRAs, SEP IRAs, SIMPLE IRAs, and Roth IRAs), but they'll all lower your tax burden.
By investing in peer-to-peer lending through an IRA, you can greatly reduce how much you'll pay in taxes. Without such a tax shelter, you might find a lot of your earnings going to Uncle Sam. With a shelter, you'll be able to keep much more of what you make.
Fully Invest Your Funds
To earn interest on your money through peer-to-peer lending, you need to actually invest your capital in loans. Money that's sitting in your account but not invested in a loan isn't earning you any income.
Thus, if you want to make as much as possible, you should always have your money fully invested in loans. Every time you receive payments from borrowers, reinvest that capital in more loans. This requires diligence, especially if you receive payments on multiple days of the month. Reinvesting anything you receive on the same day you get it will pay off, though, as you'll always be completely invested in loans.
Diversify in Multiple Ways
Diversifying your peer-to-peer lending portfolio reduces your exposure to any one risk. For example, assume you're invested in just two loans, and one borrower defaults. In this scenario, you've lost half of your investment. If you're invested in ten loans, however, and one defaults, you only lose ten percent of your investment, and the other nine loans will quickly help you more than recoup the loss.
Not only should you diversify by investing in multiple loans, but you should also diversify by investing in loans that have different risk levels, are in different sectors and last for different amounts of time. Diversifying in all of these ways will greatly reduce your risk and increase your opportunities to earn on your investments.
For more information about peer-to-peer lending strategies, consult another lender, such as Crossroads Investment Lending.