When you’ve finally gotten a good idea of what peer to peer lending looks like and how the entire thing works, and you’ve gotten acquainted with the platform’s general pros and cons, the next thing you will do is to decide: what is your general approach as an investor?
Coming up with an approach for this alternative financial strategy is about making a choice between the varying aspects of peer to peer lending, and one such aspect is the extent to participation an investor commits to when lending. Hence, the concepts of active and passive peer to peer lending come to mind.
How is an Investor Active? Passive? When that investor personally chooses which loans to fund, takes time to learn the more intricate ins and outs of the system, and has a more on-the-ground view of the platform, he is normally said to be “actively” lending. On the other hand, a “passive” lender treats peer to peer lending as something that generates passive income – he essentially trusts the entire platform to do the investments for him and just waits for the returns to come in.
Think of it as choosing between being a full-time investor and treating peer to peer lending as a source of passive income.
So what’s the difference? What’s so good about being an active lender is that it makes your entire investment more accurate. You’ll have to take some time learning a little bit more than you should about peer to peer lending, such as analyzing credit factors like public records, bankruptcies and delinquencies. You’ll have to be familiar with debt-to-income ratios, and learn how a credit score is computed in your platform until you know it like the back of your hand.
But once this is done, your active involvement with the nitpicky details allows you to target the kind of investments you personally think will bring you more returns. Pushing for your own peer to peer lending allows you to get more out of the money you lend with each choice you make.
This is not to say that the passive approach to peer to peer lending forsakes the ideal return. In fact, with the right platform you’re guaranteed solid returns, even when you’re not as actively engaged with your investment. The passive approach is ideal for those who, for one reason or another, don’t really have time to deal with the investments, but still want to benefit from the system. For instance, high net worth investors will less likely have time to be involved in every investment made out of their capital, so it’s better to just trust the system and let it do the work.
All you’ve got to do is to provide the minimum investment and the platform will take care of things for you. It’s just like choosing to have more time for yourself rather than working extra hours at the office for more pay – it might not give you the highest possible returns, but it’s all still pretty solid.
There are other approaches to peer to peer lending, but the choice of being active or passive is one you should definitely think about.
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