Why Consider Marketplace Lending?
It’s no secret that the key to sound long-term investing is proper diversification. Although investors have many more choices today than in years past, savvy investors are always on the lookout for additional ways to boost returns and increase income all while managing risk.
Marketplace Lending has emerged in recent years as a strong alternative investment for investors seeking various sources of income.
Consider this for starters: In the current low interest rate environment, fixed income investors face an interesting challenge. Investors continue to be subject to low-yielding debt instruments while trying to maintain their purchasing power for general goods and services.
Why is this? The Federal Reserve continues to monitor domestic inflation and the general health of the US economy. In their eyes, there still isn’t a compelling enough case to increase rates. Therefore, fixed income investors remain subject to almost non-existent yields.
This conundrum puts investors between a rock and a hard place. Either keep cash on the sidelines earning zero yield, allocate more to the equity markets, or remain subject to low-yielding debt instruments.
If you are exhausted with low rates and you no longer want to increase your equity exposure, then marketplace lending is worth your consideration.
How Peer-to-Peer (P2P) / Marketplace Lending (MPL) Works
P2P/Marketplace Lending is simply people and institutions lending money to others. What has traditionally been performed at brick-and-mortar commercial banks is now being facilitated online.
As a potential investor, you have the ability to direct capital to borrowers based off of credit criteria used by commercial banks. Given your tolerance for risk, you can allocate capital across a diversified pool of borrowers in order to help meet your income needs.
San Francisco-based Lending Club (symbol: LC) is probably the most well-known marketplace lending platform today because it is publicly traded. Prosper was the first player in the space with a 2006 inception year.
Loan Selection and Borrower Types
Like any other type of investing, marketplace loans are a matter of risk and reward. You will want to think long and hard about the amount of risk you are willing to accept and weigh the potential returns accordingly. You will also want to formulate an investment plan. This plan will cover such issues as:
- Risk levels
- Loan durations
- Individual or pooled loans
- Interest and principal reinvestment
- Charges and fees
Getting Started in Marketplace Lending
Just as you would take time and care choosing a stockbroker, investment advisor or real estate agent, you will want to spend time researching and comparing different lending platforms. Some of the main points of comparison should be:
- Length of time in business
- Total loan originations
- Underwriting Criteria
- Delinquency and default rates
Make no mistake. Marketplace Lending has the potential to provide great returns but it does come with its own set of risks including complete loss of principal. To help manage default risk and in order to exploit the benefits of investing, accredited investors should consider speaking with a professional marketplace lending fund manager for further information.
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