I hear this sentiment all the time. People start off conservatively in p2p lending, investing mainly in A-Grade loans and then decide to branch out once they get comfortable. I know, because I was one of those people.
When you first start out the A-grade loans look very tempting. Low default rates (but not zero) should mean a consistent return on your money. Sure they only pay 5-8% but that doesn’t seem so bad, particularly these days. New investors often feel that p2p lending is a risky endeavor in itself so they may as well mitigate that risk somewhat by choosing the most creditworthy borrowers.
What are Your P2P Lending Investment Goals?
It all comes down to your goals for your investment. For me I want double-digit investment returns from peer to peer lending. With that in mind all A-grade investments on Lending Club and AA-grade investments on Prosper pay less than this. So if I invest in these loans then I am hurting my chances of hitting my goal of 10% or more.
Now, I admit not everyone is going to have such lofty goals. Some people may be quite happy with a 5-6% return, especially given the current interest rate environment. If that is your goal then I encourage you to include the A-grade loans in your portfolio.
At Lending Club the interest rates for A-grade loans range from a low of 5.42% for A1-rated loans up to 8.49% for A5-rated loans. Even B1-rated loans are below 10% (at 9.99%). Keep in mind that Lending Club takes out an investor fee of 1% and you can see why it is impossible to earn double-digit returns here.
Prosper is a little different. Their top rating on loans is AA and these AA-rated loans pay in the single digits (although a five year AA-rated loan from a new borrower is currently 10.99% for investors). Single A-rated loans on Prosper can pay as much as 13.9%. So here it is really the AA-rated loans that are not worth considering if you are trying to earn a double digit return.
I am interested to hear from others. Did you start out investing in A-grade loans? If so, do you still invest in them? Please leave your thoughts in the comments below.