If a borrower stops making payments on a loan in which you are invested, the bank will take action. If the borrower actually defaults, the bank will pursue collection action. This might or might not result in you recovering some or all of your investment. The smart money says that your investment will not be recovered. Your job, if you have done it well, is to make sure that this default is a bump in the road rather than a disaster.
Avoiding a disaster begins with taking a close look at the loans and borrowers you can choose from. A borrower's loan will have a letter grade issued by Prosper or The Lending Company. Prosper investments are graded A-E, and then HR for high risk. The Lending Club investments have over 25 subgrades, namely A1-G5. Different interest rates are attached to each grade, and they range from 7% all the way up to over 30%. So why not just invest in the high interest loans?
The reason why that is a bad idea is because the higher interest rate loans carry much higher risks. Prosper, whose loans creep into the high ranges more readily than The Lending Club's, attracts more borrowers who present a risk of default. This is especially true given that Lending Club fees and Prosper fees, as well as a 1% commission charged to investors, are not included in the face amount you are getting from the loan. The borrower is actually paying more than what you are being paid.
The truth is, though, very few Prosper and Lending Club loans can truly be said to be low interest. There is some default risk no matter what the interest rate. The only sure way to protect oneself from default risk is to diversify the loan portfolio.
This means spreading your money across as many different loans as possible. Even a single loan at a relatively low rate can pose a risk. What if the borrower loses his job? He may default and you will have lost not only future interest, but your investment as well. This could be avoided by spreading the same money across many other loans. Recall that the minimum Lending Company investment or Prosper investment is only $25.00. Both Prosper investing and Lending Club investing can be made easy by investing in the pooled noted above
Unless you can truly afford to lose money, it is very important to diversify. The real world risk of default can be drastic. Even as few as 15% of loans going into default can drop the return on an investment you thought would pay 25%, to one that might only pay 7%. Both companies publish projected default rates for any grade of loan, which can reduce expected performance rates anywhere from 2% to 10%. Check these figures carefully and read the prospectus before investing.
Lending Club investing and Prosper investing are excellent vehicles for a potentially high rate of return. However, a Lending Club investment or a Prosper investment can carry significant risks, especially when the investor is chasing higher returns. Always check with an investment advisor before deciding.
An investment property loan is a cash credit obtained for the purpose of purchasing a residential or commercial property wherein the property buyer plans to make an ongoing or long-term profit in the future. The money granted as loan may be used to purchase a vacation property, a piece of land, condominium unit, upper fixer property, apartment, single-family house and a single detached house. However, the money granted as loan cannot be used for other business purposes. There are three major types of investment loans, and they are those that require collateral, those that need a big down payment (higher than 20 percent) to get lower interest rates and the ones that either require the investor to pay the down payment cash or only a part of it.
What are the loan requirements?To be able to obtain an investment property loan, you need to have a good credit score, enough cash reserve to make payments during months when your investment property has no income, at least 20 percent down payment, proof of income and most of all the property that you wish to purchase must pass the property appraisal. For those who do not have a very good credit score, there is still chance for you to get approval. You may consider getting an investment partner who has a very good credit rating. If you wish to get an investment property loan, it is important to strengthen your credit rating at least six months before your loan application. Paying off delinquent debts and closing old accounts only before getting a loan might negatively affect your chances for loan approval. If you have a low credit score, it is most helpful to get professional advice before you do any kind of measures.
What is the process of getting an investment property loan?Assuming that you have already strengthened your credit score as a preliminary step, the first step is to aggressively shop around for lenders and compare their interest rates before making a decision. Aside from interest rates as your major consideration in choosing a lender, also scrutinize their lending requirements because there are some lenders that are less stringent than others. Then, file your application and you will be asked for your personal information such as your employer's name and address, your social security number and many more. After you complete the application process, a verification process will be performed by the bank or lender. They will check your credit score and perform an income evaluation. After you pass the verification, the lender will check if you can afford to make a substantial down payment which would be around 20-35 percent depending on the lender you've chosen. Applying for investment property loans nowadays have become more strict compared to before, and to get approval you don't only need enough down payment and proof of your excellent credit record, you also have to choose a property that is worth your investment property loan and that will be profitable in the future.
