Living Out Of Debt

Building a successful portfolio typically means including a mix of investments to permit diversification. A typical mix may be long term assets as compared to short term assets, and floating rate investments with fixed rate investments. Perhaps a portfolio that is skewed towards domestic equities could use some holding from other regions.

Short term investment portfolios will typically include some investments in loans of one kind or another. Treasury bills, which are a component of most portfolios can be looked upon as the ultimate loan: to the government. Many investors prefer short term investments in bank CDs or money market assets. The flexibility and liquidity given by these investments is an attraction, but the yields are fairly low.

Now there is a new opportunity to invest in short term investments in loans, that can yield higher returns than traditional bank CDs or T-bills. Peer to peer lending is a loan concept that allows investors to lend money directly to consumers, thereby giving them an opportunity for higher yields on their investments.

This type of loan adds diversity in another valuable way, since it is a completely different asset, that will behave differently when markets shift for other investments.

The idea behind peer to peer lending is fairly simple. The concept is that borrowers in need of funds are matched with lenders who are willing to lend funds directly in order to increase their yield. The mechanism also permits a better match of risk/reward ratio, since the lender chooses the borrowers to match his risk profile.

An investor may limit his bids on those loans with AA or A rating, with a loss rate of 2% or lower and then choose a mix of loans that meet that criteria. He could even spread that moderate risk out even more by choosing many borrowers to lend to. The combination of choosing exact rating and rates, and spreading loans out over many borrowers creates a perfectly tailored portfolio. An investor who was going to lend $5,000 could pick 50 or more borrowers to lend to, and spread the risk substantially. His yield will, of course be higher as he raises his risk tolerance for the portfolio, but he can continue to use diversification in any blend of loans.

Peer to peer loans are normally 3 year amortizing loans. This means that the monthly payments by the borrowers, that include principal and interest, are processed to the lenders right away, so lenders do not have to wait for the maturity of the loans to recover their principal. The rates on the loans are fixed, which is an attractive feature in a market that sees CD rates continue to fall.

The mechanism is fairly simple. Prospective borrowers list their borrowing requiremtns on the site, and their credit score and rating is generated. These listings are available for lenders to look over, and any investor/lender can choose any mix of loans to construct a loan portfolio that suits his strategy for short term investments. In this way, an investor meets his goals of risk/reward ratio, short term investment portfolio diversification with a new asset class, and further diversification by breaking that investment into many small pieces.

Get a loan today with engagement ring financing and short term investment