Participating In Peer To Peer Lending As An Alternative Fixed Income Asset ClassOct 25, 2016 Blog peer to peer lending
Peer to peer lending might have the borrowers to drive the demand, but this indicates that there is a supply side to the platform too, which are the lenders. After all, how do you think the loans get funded? It is an attractive prospect to lenders as it yields a higher rate of return.
Peer to peer loans are unsecured, therefore some loans will most certainly default, but diversification is the name of the game. It is important to diversify your contributions among the loans available. The growth of P2P and the introduction of institutions is starting to create the potential for advisors and their clients to access P2P loans as a form of alternative fixed income asset class.
For a lender lending money via a P2P platform which facilitates the origination is the equivalent function of investing into a bond. A P2P loan will include interest payments and periodic repayments of principal to the lender, like other fixed income investments.
As any financial advisor knows, the key to managing default risk is diversification. This holds true when making unsecured personal loans to individuals. As a lender, you wouldn’t be stuck for the full term waiting for all the principal and interest payments to come in. You are able to sell your participation of the loan on a secondary market. This creates the possibility for lenders who have a change in circumstances.
This article is based on a piece by Michael Kitces, you can read the full article here.