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Risks Peer-to-peer lending? : passive_income



Peer-to-peer lending has three main risks:

  1. The business that you are lending to may default on the loan. This means you need to diversify and loan to many different companies, and never loan your entire capital to one borrower.

This is quite an intensive and time consuming process, as you need to review each borrower on an individual basis (unless you trust the ratings given by the platform, at face value).

2. Even if a loan is not defaulted on, the borrower may restructure the loan (eg. pay less interest or offer a haircut, in lieu of an outright default).

When P2P platforms say that have “low default rates”, they may not be telling you that while few borrowers default, many pay less interest than initially agreed.

3. The P2P platform may have the means to grab your cash and run, so make sure funds always go to an escrow account (not to the platform itself).

Even so, if the platform runs into trouble – legal complications, funding issues, etc., you could be in a situation where your funds are tied up for a very long time while its settled.

There IS a way to absolutely minimise these risks, but it is likely not helpful to the average investor: that’s to use P2P platforms that only work with accredited investors (eg. the platform only allows you to invest if you meet high requirements, like a minimum net worth of $1 million). These platforms tend to be the best regulated and capitalised, but are frankly inaccessible to most.


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