Create a Diversified Portfolio
To minimise your risk when investing in peer to peer loans you should seek to create fro yourself a diversified portfolio of loans. A diversified portfolio helps to spread the risk of a default in a loan across many different types of borrowers.
To achieve the diversification we recommend making several small investments across a large number of borrowers (say 10 or more). In addition it helps if the borrowers have different characterisitics (such as reason for wanting the loan, location, age etc).
Setting Some Criteria
Prior to selecting the borrowers and loans you want to bid against and invest in we suggest that you set yourself some criteria such as:
- What credit grade of borrowers you are willing to lend against
- What will be the size of your total peer to peer loans portfolio
- What is return are seeking on your portfolio
When you view loans on Lending Hub you may see a wide raneg of interest rates, some of which might be quite high and attractive to the lender. You should remember that the higher the risk of the borrower the greater the required premium (as compared to a better rated borrower) to compensate for the additional risk.
Note: Lending to borrowers with higher interest rates may increase the chance of a default which may impact the return on your portfolio.
Obtain Professional Advice
We recommend that you get some professional advice whenever considering an investment.