With p2p lending, you have the opportunity to invest small amounts of money into each loan. In order to get the best chances of achieving a consistent return you need a large number of high-quality individual loan investments in your portfolio - each one is called a note that corresponds to the loan. Our target portfolio contains at least 400 notes.
Loan Selection & Charge-offs
With unsecured consumer credit, whether we’re talking about credit card debt or p2p loans, losses are inevitable. Minimizing losses is the best we can do, and indeed it makes a big difference. Our job is to minimize your losses based on a certain target return threshold, but there is no way to eliminate losses entirely. In the business of lending, charge-offs are a fact of life. With an independent risk assessment from NSR Invest, in addition to credit assessment at the marketplace level, you can be sure there are checks and balances on your portfolio that align with your investment goals and risk tolerance.
Fast Order Execution
Each marketplace has a limited supply of loans available to choose from, and the best loans get snapped up quickly by fast automated investing systems. Even the smartest loan selection algorithm can’t help if you have no good loans to choose from. The reality is that the majority of investors are left in the dust when it comes to choosing loans.
Individuals accessing loans directly on the marketplace platforms are bringing a moped to the racetrack. Meanwhile, institutional investors are building complex systems to gain fast access to the best loans through a backdoor called an Application Protocol Interface, or API. To beat the institutions at their own game, we employ a state-of-the-art API-based trading system, one of the fastest in the industry. And our win rate is excellent.
In order for a p2p account to continually generate returns in tandem with your investment strategy, you need to ensure that cash generated from monthly loan payments are quickly reinvested into new loans. Loan repayments of principal and interest flow into your account - giving you the ultimate flexibility to either reinvest payments into new loans and compound your growth, or take distributions to help supplement your income. However, if you don't reinvest cash quickly enough, or your monthly repayments exceed the distributions you intend to take, your returns may be affected by something known as "cash drag".
Cash in your p2p portfolio earns no interest. Investing manually, cash tends to build up, reducing your invested capital and ultimately lowering your returns.
Thankfully, NSR Invest's automated order execution engine, coupled with our proprietary credit models, is able to keep cash drag to a minimum.
Economic Conditions Impact Returns
Unlike other asset classes which are sensitive to the expectations of Wall Street, p2p loan performance is tied to the performance of the US economy and tends to correlate with unemployment rates. Your investment strategy dictates your level of risk. Portfolios with higher target returns are more susceptible to losses due to an economic shock or rapid spikes in unemployment than portfolios with lower target returns. Therefore, it’s important to make sure your return expectations are considered in tandem with your risk tolerance.
P2P is Longer-Term Investment
Underlying loans in p2p portfolios typically range in maturity from 36 to 60 months in length, and cashing out of a portfolio takes time. These are relatively illiquid positions. No one should plan to “cash out” of a p2p position like they would a publicly traded stock or bond. Investors should only invest in p2p the portion of their portfolio that they are willing to tie up in a single asset class for longer periods of time.