A question of time and expertise: active vs passive P2P lending

How much time do you have to manage your investments? How sophisticated is your level of financial expertise? These are key questions to ask yourself as you define your ideal peer-to-peer (P2P) lending strategy. In the world of P2P lending, there are two key investment approaches: active and passive. Each method has its own pros and cons.

What is active investing in the P2P lending context?

On a P2P platform that offers an active investing model, investors manually select the loans they want to invest in. Depending on the lending platform, this may involve evaluating and choosing interest rates, assessing the probability of default, and more – in relation to each loan or borrower.

In order to minimise risk and optimise opportunity, active investing usually requires you to conduct a certain amount of due diligence in order to choose the most suitable loans. This may call for both financial expertise and an investment of time, especially when you take the breadth of a diversified portfolio into account. The more loans you bid on to spread your investment and risk, the more time you need to spend on the platform.

Also, depending on how often new loans are loaded onto the platform, investing may be time-sensitive. You may need to make sure that you log in at the right times each day or week, and make swift decisions, in order to compete with the other investors in the system.

While this active approach could ensure that you dedicate your capital to only the most suitable (and potentially rewarding) loans, it can be onerous. Ultimately, the viability of this method depends on your experience and the amount of time you have available. Additionally, it depends on the quality and quantity of the information provided by the platform.

What is passive investing on a P2P platform?

Some platforms automatically allocate your investment, spreading your capital over a selection of loans at regular intervals. If you’re investing through the Loanpad platform, your investment is automatically diversified across the entire performing loan portfolio on a daily basis.

This strategy is simpler and less time-consuming when compared with the active approach, calling for no specialised financial expertise beyond deciding to invest in P2P lending and, in relation to the Loanpad platform, choosing between the two easy-to-use lending accounts that are available. These Loanpad accounts offer the operational simplicity of typical online current accounts, but with higher returns due to the higher degree of risk. With both accounts, your funds are diversified on a daily basis and you earn interest every day.  Free access to funds is available from the Classic account*, while the Premium account pays a higher rate of daily interest, but free access requires 60 days’ notice*. Both accounts are ISA eligible – so, if held within an ISA wrapper, investors can earn the same great rates tax free.

The passive P2P investing method tends to appeal to people who don’t have time to analyse each loan opportunity, but still want to generate the type of returns that the P2P lending model can offer them. These could be high net worth or veteran investors who have large investment portfolios to manage and therefore less time to focus on the details. Alternatively, these investors could be P2P newcomers who have minimal investment expertise and want to leave the analysis up to the lending platform.

On the Loanpad platform, you can earn an interest rate of over 4% passively with a Premium account. You may well be able to earn a higher interest rate  elsehwere, but you could also face a higher risk of double-digit losses.. On Loanpad, you benefit from a stable income because you’re earning interest daily. You also have the advantage of compounding your returns quickly. And, importantly, you benefit from a unique lending model that is lower risk and fully focused on preserving your capital as it grows.

Commenting on this topic recently, Neil Faulkner, chief executive and founder of P2P analysis firm 4th Way, explained that some P2P platforms promote the passive approach, because they “worry that investors are not diversifying enough”.

“For investors, automatically lending increases the number of loans that you lend in. Lending across more loans dramatically lowers the risk of losses” Mr Faulkner added.

Which P2P investment strategy suits you?

Would you prefer to roll up your sleeves and manage every detail of your investment, or select a good system and let it do all the hard work for you?

If the latter sounds more attractive, find out more about Loanpad’s fully automated Classic or Premium lending accounts here.

* We do all we can to release your money as soon as you ask for it. But this does depend on funds being available, from time to time there may be a slight delay.