Diversification means spreading your money across many loans instead of investing everything in just a few. If a borrower defaults, this then only affects a small part of your money.
You can diversify on several levels:
- Borrowers: many different borrowers, with small amounts per loan
- Rating: loans from different rating classes
- Type of loan: personal loans and SME loans, instalment loans and bullet loans
- Security: loans without security and loans with security such as a guarantee, a mortgage lien or a global assignment, see How can I tell whether a loan has security?
- Term: short and long terms
From CHF 100 per personal loan, you can spread even a smaller amount widely. Auto-Invest can help you do this.
Diversification reduces the risk, but does not eliminate it. Even a widely diversified portfolio can make losses.