Investing with LendingClub as a Way to Diversify Your Portfolio

Guest Post: June @ Dinks.co

In any investment portfolio, it is usually a good idea to diversify your holdings in order to spread your risk. By avoiding a cash concentration on any one particular type of fund or investment, you can stave off potential disaster during a large loss in that market.
 
Diversifying your portfolio can help to ensure that all of your investments will not suffer losses in a bad economy, putting you on the path to being a millionaire. By considering a number of different assets and their relationship on the market, you can better spread the risk over your entire portfolio and safeguard your investments.
 
Peer-to-peer lending is one way that investors can diversify their portfolios. Through websites such as LendingClub, peer-to-peer lending offers a unique investment opportunity that can often outpace the return on some traditional forms of investing. Read on to learn more about diversification through products like peer-to-peer lending through sites like LendingClub.

What is Peer-to-Peer Lending?

Peer-to-peer lending, or p2p, is a process where one person lends money to another without the use of an official financial institution to act as the middleman. Because a traditional bank is not involved in the process, p2p lending does carry more risk for the investor than traditional lending, but it also brings with it a higher potential return on the investment.
 
The way that it works is relatively simple: borrowers take out loans funded by individual investors at a given interest rate. Investors have the ability to review borrowers’ profiles before deciding to approve the loan, and can approve the full request loan amount, a partial amount, or decline the loan. Other investors can also choose to fund the loan if it isn’t fully funded by a single investor.
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For creditworthy borrowers, p2p lending sometimes offers better interest rates than those offered by traditional banks, and it’s possible to get a competitive rate even without an established credit score. However, be cautioned because you can still get declined for a p2p loan.

How does p2p Lending Open the Door for Alternative Investing?

With the age of the internet, alternative investing has certainly blown up. An alternative investment is any type of asset that is not a conventional or traditional investment such as a stock or bond. Alternative investments can run the gamut, from rare coins to hedge funds, each with its own advantages, disadvantages, and unique aspects.
 
Naturally, p2p lending can be considered an alternative investment.
 
For investors, p2p lending can be favorable because there’s the potential higher return on their investment compared to others. Additionally, it’s possible to invest smaller amounts across multiple borrowers which helps with diversification. While there is some risk that borrowers will default on the loan, this risk can be reduced by reviewing the borrowers’ profiles carefully before deciding to contribute a loan.

This type of investment is a doorway for many people to get started in alternative investing, allowing them to try a new way to invest their money outside of traditional methods. This may ultimately lead to investors deciding to explore other types of alternative investments, such as precious metals, real estate, and mutual funds.

How Can You Diversify Using LendingClub's Model?

One such example of this investing model is LendingClub. Investors can diversify their portfolios with relatively small amounts of money by contributing to certain personal loan applications.
 
First, you must qualify as an investor, which means living in one of the approved states and meeting certain income and net worth requirements. Once approved, you can begin searching for and making loans through LendingClub’s website.
 
In order to invest, you need to find potential borrowers with unfulfilled loan applications. It’s relatively safe since borrowers on LendingClub’s platform must be approved with a minimum credit score of 660 among other qualifications. While that can be considered a baseline, there’s more to it if you want to make a safe investment.
 
Each borrower is issued a loan grade based on his or her credit report and other factors. Investors can then choose to lend money to borrowers (with a minimum of $25 per loan) at a specified interest rate. A loan application can stay on the platform for 14 days; after this time, the application will be deleted from the site.
 
So how does an investor make money on this? Well, once the loan is approved, the borrower starts making payments with interest within 30 days. The historical return on investment for LendingClub investors is between 4 and 6 percent, depending on the approved rate. These loan terms range from 3 to 5 years, so you can expect a short-term ROI as an investor.

Conclusion

​If you are looking to diversify your portfolio, p2p lending sites such as LendingClub offer a way to break into the world of alternative investing. With strong annual returns and the possibility of increasing your return based on the level of risk you undertake, p2p lending is a good way to get into alternative investing for many people.