Peer to Peer Lending Approaches: High vs. Low Risk

Peer to Peer Lending Approaches: High vs. Low Risk

Upon understanding how exactly peer to peer lending works as well as having a pretty good idea of how the risks and benefits play around in the industry. A good investor would start working on his or her own brand of strategy – one that’s not only suited to specific needs and capacities, but also focusing on the different types of risks and activities.

There’s no one-size-fits-all investment strategy for investors, so your situation is important in identify the best approach for you. And while it’s impossible to list down all the specific investment strategies you could possibly take on, knowing how one strategy differs from the next can do so much to guide you.

For instance, investors vary in terms of how much they are willing to invest. Put in another way, they vary in terms of the risks they are willing to undertake. Most peer to peer lending sites will have some kind of classification system, which is usually in the form of letter grades. The least risky investments are graded A, and the letters go down as each type of investment is found to be risker than the last. One thing investors will notice is the apparent inverse correlation between the investment grade and the interest rates. So you can have, for example, a 5%-6% interest rate for the top rated investments, 15%-20% for the middle rated ones, and as much as 30% for the high risk investments.

The rational for the correlation is quite simple: incentive. Without this kind of system, investors will naturally rule out the lesser rated investments because they’d rather deal with someone who are better at paying back their loans, putting lesser rated borrowers at a disadvantage, especially when they might be the ones that need the loans the most. So by offering higher interest rates, investors will consider taking on a lower rated borrower.

And this dichotomy happens to be a very common in all types of businesses. With peer to peer lending, investors get to choose whether they’ll want a more stable investment even if they have the least potential of returns, or if they want to take on risks in the hopes of getting something of much higher value.

This choice will usually be determined by how much risk you think you can afford. For instance, if you’re someone who needs the financial security because you’re old with fewer money to invest or you’ve got lots of dependents, then you’re clearly not capable to absorbing risks compared to somebody who’s got a higher net worth and, perhaps more money to spare.

But either way, just know that your approach can change as when your circumstances do. You can always start safe and try to work on some good returns, and you can start funding higher risk investments once you’ve saved enough for it. What’s important is that you approach the peer to peer lending in a way that best suits your situation, so you can make the most out of it.

Learn more about how peer-to-peer lending from MoneyEgg can increase your wealth by visiting MoneyEgg – http://www.moneyegg.com

Are you ready to boost your spare funds with up to 6% tax free interest using MoneyEgg? If so, tell us your comments or questions and we will respond with our expert peer to peer lending financial advice.

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