How to Earn Higher Yields Using Peer to Peer Lending
In today’s low interest rate climate, investors are looking for new ways to generate higher yields for their portfolios. With 10 year Treasuries now yielding less than 2% and 5 year Treasuries less than 1%, what is an investor to do? You can accept more portfolio risk and invest in corporate bonds. Investment grade bonds are yielding less than 5% and even junk bonds, which come with much higher risk levels, are only in the mid 7’s.
There is an alternative investment strategy (that most investors are unaware of) that can greatly increase investment yields, and do so with less risk than you would expect. This alternative investment strategy is called peer to peer lending.
Peer to peer lending is the act of lending and borrowing between individuals or "peers" without the inter-mediation of a traditional financial institution. Becoming an investor in peer to peer lending isn’t something we would recommend doing on your own. There are several web sites that facilitate the transactions, handle credit checks, collect and distribute payments, and when necessary, collect on delinquent loans. Of these sites, Prosper is the oldest, largest, and by far, the best available.
To date, Prosper has facilitated more than $220 million dollars in loans. They charge a 1% fee for borrower verification, loan processing, and collections. As an investor, you can start off loaning as little as $25 to any individual. This allows you to create a diversified portfolio of loans, which mitigates your risk as an investor. Prosper even provides a secondary market place for the loans so you can trade them with other investors to increase your yield, or change the duration of your holdings.
Prosper’s loans currently yield, on average, 10.69% to the investor, which is net of fees and default losses. Depending upon the risk associated with a particular borrower, you can get yields that are twice as high (although we don’t recommend this). Prosper requires that borrows have a credit score of at least 640, and their average borrower has a score of 737. While these aren’t stellar credit scores, it does eliminate extremely high risk borrowers.
When you invest with Prosper, you get:
- The ability to choose your level of risk versus return
- A pre-screened pool of credit-worthy borrowers
- Transparency with who you are lending to
- Control over the parameters of your investment
- Diversification of your overall portfolio
Peer to peer lending has its share of risks and certainly isn’t suitable for all investors. However, if you’re looking for more yields from your investment dollars, Prosper can provide them for you, while still maintaining a favorable risk/reward ratio for the investor.
To learn more about investing in peer to peer lending, or to get started with Prosper today, click the following link: 10.69% Returns With Prosper
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