What is cash drag?
Cash drag describes a situation when funds deposited to a loan marketplace are not successfully invested due to a limited supply of loans or too strict auto invest setting by the investor.
In short, this means that no loans that satisfy the investor's preferences are available for investment.
Cash drag is not desirable because the uninvested funds are not earning any interest. In other words, with cash drag, investors undergo a potential profit that could have been made.
Frequent cash drag can cause a lot of trouble for investors and loan marketplaces where it occurs as the funds could potentially be deployed on other marketplaces where they would be earning returns.
How to avoid it?
There are multiple strategies to avoid or minimize cash drag. Here are some of the most popular ones:
- Do nothing - if cash drag is a short-term issue sometimes it is worth simply waiting for a new supply of loans to arrive in the marketplace.
- Review your auto-invest settings - it might be the case that the interest rates have changed or that you simply need to widen your settings to capture a greater share of potential loans.
- Move the capital to a different marketplace - this is the last resort. If you have applied the strategies above and you still face cash drag, it might be worth moving some of the capital to another marketplace to ensure you do not lose out on potential interest.