If you are serious about making this investment, the whole thing can become tedious.
Someone with a nice chunk of capital doesn't want to go through the motion of picking individual loans, any more than many investors don't want to go through the process of individual stock picking.
And, to tell the truth, most millionaires don't invest in individual loans when they get into P2P lending — at least that's not how they do it according to Brendan Ross, the President of Direct Lending Investments, LLC.
Invest in a Person and a Story
“Millionaires understand that you can only be successful in a craft if you are dedicated to it,” says Ross. “If you want to passively put your money to work, and you want to make money, you have someone else do it. That means, if you want to get involved with P2P lending, you don't do it by picking loans individually on a P2P platform.”
Instead, Ross says, millionaires find the person they believe will be good at it, and the person that is structurally positioned to succeed. “A millionaire looks for someone who has fair fees, the relationships to ensure that they get the best loans for their goals, and who is smart. Most millionaires own businesses and are used to delegating, and it's worked very well for them. They know that they can delegate some of their investing to others as well.”
“Think about it,” Ross continues. “Even a mutual fund is a delegation. You don't want to replicate it by picking stocks, so you essentially hire Vanguard to do it for you when you invest in a mutual fund. If you are someone who wants to move money away from stock investing, and you aren't the kind of person who picks individual stocks, why would you be the kind of person who wants to pick individual loans?”
It's one thing if you want to make investing your full-time hobby. If you have the time and energy to put into it, and you think it's a fun way to earn money, go for it. However, if you want your money to grow without a huge amount of effort on your part, Ross says that delegation is key.
Delegate Your P2P Lending
Ross mainly works with millionaire investors who are also accredited investors. In the case of Direct Lending Investments, you need a minimum of $100,000 to take advantage of the professional fund management. According to Ross, between 95 and 98 percent of millionaires use a hedge fund with professional management to invest in P2P loans.
However, that doesn't mean that you're doomed if you don't have $100,000 to invest in P2P lending. “Look at what millionaires do, and figure out how to be that hands-off yourself,” says Ross. He says that you do have some options when it comes to this type of investing.
Lending Club, Prosper and Third-Parties
[insert disclaimer] **Please note: Lending Club is no longer accepting new investors for its notes platform and will retire its notes on December 31, 2020. ** [end disclaimer]
First of all, both Prosper and Lending Club have programs that allow you to delegate the way you invest in P2P loans. “They both have accounts where they let you set your investing criteria,” says Ross. “You can build a pie chart, and they help you find your risk profile. Prosper or Lending Club fills the orders for you, finding loans that match your goals and your risk profile.”
Prosper's service is called Premier, and Lending Club's is PRIME. Both require a minimum of $25,000 to take advantage of this type of management. You pay an annual percentage of the account management, and you pretty much just set it and forget it.
If you don't have $25,000 to invest, you can use Quick Invest with Prosper to reinvest your earnings according to your parameters, but it isn't the same as the managed account. Lending Club doesn't have a way for you to automatically reinvest your returns, so if you aren't using PRIME, there isn't a way to even sort-of delegate your efforts.
Another option is to use third-party software to help you invest. “There are people who believe they have an edge on Premier and PRIME,” says Ross. “They have programs that will go through what is available, and, based on your profile, pick them for you.”
The main difference between letting Lending Club or Prosper choose your P2P loans for you, and letting a third-party software program do it is that the program actually makes a more nuanced choice. “Instead of getting random B-rated loans, as you get with Lending Club and Prosper, you get statistically chosen B-rated loans that are supposed to be better overall,” says Ross.
Ross claims that Prosper and Lending Club essentially randomize your portfolio according to your profile, just grabbing any loan that fits the category. Third-party program allow you to find loans at the end of the “B” spectrum closer to “A”, when you might end up with a loan closer to “C” with the platforms' process.
However, even though programs like P2P-Picks.com can help take the guesswork out of choosing loans, you still have to do the investing yourself. As P2P lending gets more popular, though, there is a good chance that more services will help you automate your P2P lending — and there is even the chance that the coming years will offer ETFs that allow you to invest in a P2P portfolio.
“No matter what you decide to do,” says Ross, “the important thing is to reduce the amount of work you're doing to invest in these loans. Paying attention to individual loans, looking over them, buying them — these are things most millionaires wouldn't do. It's madness, an incredible amount of work.”