Building a successful portfolio typically means including a mix of investments for diversification. A typical mix may be long term assets as compared with short term assets, and floating rate investments with fixed rate investments. Domestic investments may be balanced by international investments, etc.


Even with short term investment, many investors seek to diversity further with different types of loan. For example, T-bills, which are essentially loans to the government, are usually a part of a short term investment plan. Many investors prefer short term investments in bank CDs or money market assets. The flexibility and liquidity offered by these investments is an attraction, but the yields are fairly low.


Now there is a new opportunity to invest in short term investments in loans, that can yield higher returns than traditional bank CDs or T-bills. Peer to peer lending is a loan concept that allows investors to lend money directly to consumers, thereby giving them an opportunity for higher yields on their investments.


Any quest for diversity will be even further enhanced, since this is completely new asset class that would be added, that of consumer loans.


The peer to peer lending philosophy is a simple enough one. A specially designed site matches borrowers who are interested in short term loans with lenders who are seeking a better yield on their investments. The mechanism also permits a better match of risk/reward ratio, since the investor chooses the borrowers to match his risk profile.


For example, an investor may look at only those loans with excellent ratings, and very small loss ratios and put together a portfolio comprised of only those types of loans. This conservative attitude could be further diversified by spreading the investment amount over many loans. Investors in peer to peer loans have the ability to construct their investment program in such a way as to diversify risk substantially. A $5,000 investment can be lent to as many as 50 borrowers, reducing the risk of the loan very widely. The yield on such a conservative investment would be lower than that of a more aggressive mix of loans, but the investor has the choice. Look on BBC news


Peer to peer loans are normally 3 year amortizing loans. Monthly remittances of principal and interest by the borrowers are paid quickly to the lenders; lenders don't wait until the loan maturity to recoup their investment. Loans are fixed rate and in recent falling interest loan markets, offer an attractive short term investment alternative to CDs that have been paying lower and lower interest.


The way that online investing operate is not at all complicated. Prospective borrowers list their borrowing needs on the site, and their credit score and rating is generated. These listings are available for lenders to look over, and any investor/lender can choose a particular mix of loans to construct a loan portfolio that suits his strategy for short term investments. As a result, investors have the ability to create risk levels and diversification levels that are exactly suited to their requirements, simply by reviewing and choosing the loans on the site that suit their needs.