The simple interest rates on each listing is an indicator of the credit risk of the borrower. The higher the interest, the higher the credit risk, which is summarized in the fact sheet that is published along with each listing.
There are various strategies that our investors have used to diversify.
Minimum amount into each and every loan
Some investors prefer to invest the minimum amount possible into each and every single loan. This way, even if one loan were to default, the principal amount lost would not impact the entire portfolio heavily.
E.g. $100 minimum into 50 loans at average 12% p.a. yields you $600 in gross returns. Assuming a 3% default rate on principal, your portfolio would still yield you $450 in gross returns.
Higher amount into lower yield and lower amount into higher yield
Some investors prefer to invest more into lower yield loans, since they are assessed to be stronger borrowers and smaller amounts into the higher yield loans.
A stronger borrower would be charged between 8% - 11% in simple interest, while the ones assessed to have higher credit risk will pay between 12% - 16% p.a.
E.g. $1,000 into 3 loans at average 9% p.a. and $100 into 20 loans at average 14% p.a. yields you $270 from the lower yield loans and $280 from the higher yield loans for a total portfolio gross return of $550. Assuming a 3% default on principal, your portfolio would still yield $400 in gross returns.
Importance of reinvesting repayments
The power of P2P lending is truly demonstrated when investors reinvest their repayments. Since all the listings on our platform have loan tenures between 1 to 24 months, investors receive repayments in monthly instalments or bullet repayments within 3 months. This gives you the opportunity to further compound your returns by reinvesting the repayments into new loans, generating additional returns on both your principal and interests earned.
E.g. $1,000 into a 1 month invoice at 12% p.a. After a month, you receive your repayment of $1,000 principal and $10 gross return. You then reinvest the $1,010 into a 3 month loan at 12% p.a. After one month, you receive $336.67 in principal and $10.10 in interest. You reinvest $300 into another loan for 6 months at 12% p.a. Now you're generating further returns on your repayments that you've already earned interest on!
Disclaimer: This article is not meant to constitute/be construed as a form of recommendation, financial advice, or an offer, invitation or solicitation from Funding Societies to buy or subscribe for any securities and/or investment products. The content and materials made available are for informational purposes only and should not be relied on without obtaining the necessary independent financial or other advice in connection therewith before making an investment or other decisions as may be appropriate.