The loans that I invest in pay a fixed amount of money per month. A portion of it is principal and another portion of it is interest. As the loan matures, a smaller proportion of each payment is interest and more of it is principal.
I thought it might be profitable to hold the loan for about a few months after funding it and then sell it to another investor with a large fraction of the principal still intact. I ran some calculations on a spreadsheet. I earn 25% of the interest in the first 11 months of a 60-month term loan at 20% interest, and then immediately sell the loan off to recoup 90% (the remaining principal) of my original investment. So I earn $15 on my original $100 investment in just 11 months. Then rinse and repeat.
If I hold the loan until maturity instead, every additional month I hold it for earns me less and less interest (as a percentage of my original investment), meaning each period of time spent holding it is less profitable. I might as well get my principal back as soon as I can.
My experience with P2P lending is that the loans are riskier earlier in the term, so ironically, I currently like to purchase loans that have an 18-month history of on-time payments from the secondary market. Therefore, the higher amount of interest earned in the earlier periods is countered by the higher risk, which can easily eat into the profits.
Am I missing something crucial from my assumptions, or is this generally correct?