I’ve always been fascinated with fixed income. I don’t invest in it much since I still have a long time horizon and therefore the ability (but maybe not the mentality) to endure riskier instruments. With fixed income, such as bonds and debt, one gets a “safer” return because if the company where to become insolvent, then you have a higher priority of claims to the company’s assets. A higher priority relative to preferred shareholders and common shareholders. This year I decided to take a look at peer to peer lending as another source of passive income.
Peer To Peer Lending Passive Income
A couple of my friends have had fantastic success investing in peer to peer lending companies such as LendingClub or Prosper. This also acts as a channel of diversification for passive income if you take all of your total investments as a whole. Because of that, I decided to open up an account with LendingClub and deposit $1,000 to get started.
In peer to peer lending, you search and decide who you want to invest in. The sites will show people’s listed income, credit scores, interest rates, etc. There are a number of filters you can select from when searching for investments.
From here, you get to decide who’s borrowing your money. It goes without saying that riskier borrowers will generate a higher return (higher interest rates). Additionally, on LendingClub, they also rate the loans from letter grades A to E. I like to think of it as a credit rating system similar to S&P or Moody’s.
Peer to Peer Filters
My personal preferences for filters only include borrowers rated A, B or C. In addition, they must have verified income and have 0 delinquencies in the past 2 years. Lastly, their credit score must be higher than 700.
I started this peer to peer lending account in January and as of April, 9, 2018, I have received $8.45 in passive income in the form of interest payments. This brings my total account value to $1,008.15. On an annualized basis, this amounts to 10.27% per year. Of course this is a projected amount. Not a realized amount. Since it has only been three months from when I opened this account.
Peer to Peer Lending Conclusion
With the addition of an unconventional fixed income component into my core-satellite portfolio, I can say I finally have more than just equities. Fixed income is a very popular channel for passive income because it’s more guaranteed than equities and more predictable. Peer to peer lending is only one possibility in this area. Most fixed income investors will purchase bonds and debt from corporations and companies.
Peer to peer lending provides a unique way to invest in loans from personal individuals.