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As Peer-to-Peer Lending Grows Up, Investors Seeking High Returns, Safer Bets Jump In


To make money in P2P lending, the trick is not to loan to one person, but rather to create a diversified portfolio by loaning to many borrowers.

Perhaps the main draw behind P2P lending is the risk management opportunity that a diverse sea of borrowers provides: The success rate behind P2P lending is not usually about loaning to one person, but rather, creating a diversified portfolio by loaning to many borrowers. Though investors run the gamut from small investors who put forth as little as $25, to institutional investors, the concept is about spreading bets. "No one who has invested [with LendingClub] in 800 notes or more (which can be done with as little as a $20,000 investment), has ever lost money -- regardless of strategy or timing," says Sanborn.

Jane Boon of New York City, NY, is a self-described "early adopter" of P2P lending via Prosper. Though she lost about 5% on her investment in the pioneer days of the P2P market, which she described as having "fewer rules guiding borrowers and lenders," she's currently experienced favorable returns of about 13%, which she credits to the Proper's "new lending format and improved visibility into borrower background." Boon says she seeks borrowers based on criteria like those who already successfully borrowed (and paid) on a peer-to-peer platform, borrowers who have also been P2P investors, those risk-graded B, C, or D and who earn more than $50,000, and those with a favorable history regarding delinquencies and debt-to-income ratio. She also favors borrowers in certain professions, including military officers and scientists who she says tend to "have low rates of default on Prosper."

Investor style is varied on the P2P platform: Some investors, like Boon, prefer to analyze the site-provided data to develop their own strategies for identifying what Sanborn calls "pockets of opportunity." Others mine borrower data to spot trends at a much deeper level, and some are content to yield lower returns by lending only to "grade A" investors.

Why do investors trust the methodology behind the rating risk scores P2P sites assign? The credibility factor behind the P2P market is heightened by the impressive leadership teams both sites boast. For example, Prosper is led by financial services and technology executives with roots at the Charles Schwab Corporation (NYSE:SCHW), and Capital One Financial Corporation (NYSE:COF). In addition to expanding its stable of institutional investors, Lending Club's leadership also includes decision-makers like John Mack, former Chairman of the Board of Morgan Stanley (NYSE:MS).

Strangers on the street look a lot more trustworthy with such executives standing behind them.

Twitter: @WellnessOnLess
No positions in stocks mentioned.
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