Published on August 14th, 2020 | by Jenny0
3 major risks when it comes to peer to peer lending
Knowing the risks is very important when you are looking into diversifying your portfolio through peer to peer lending. The alternative investment method offers varying levels of returns however they can come at the cost of your financial security if you are not careful.
In today’s article, we break down some of the different risks of peer to peer lending and how they can impact on your portfolio’s financial performance.
1. Peer to peer lending puts your initial capital at risk
The first and perhaps most obvious risk of peer to peer lending is that the money that you loan out is at risk. It is different from investing in the stock market as you do not own any underlying assets.
This risk can be partly alleviated by the practice of diversification across your portfolio, a method we constantly preach at Peer to Peer Lending Advice. Doing so allows you to take advantage of different investment opportunities across a wide variety of sectors and industries.
2. Peer to peer lending platforms can close, making it difficult to secure payments
Another risk when it comes to peer to peer lending is the fact that the provider you are with may go under. Whilst this an unlikely event, it would make it difficult to reap the interest from your loans.
Part of this risk can be managed not only by diversifying the types of investments that you go with, but also the peer to peer lending providers that you use. Having your funds split between the different providers like Ratesetter, Funding Circle and Prosper will help lower the impact on your money if one of the providers fails.
3. Peer to peer lending locks your money away
One of the other issues when it comes to peer to peer lending is the fact that the money is tied up for a long time. This could be an issue if you need to access the funds at short notice which is why you should always look to build up an emergency fund first.
Make sure you know the risks when it comes to peer to peer lending
The risks listed above are just some of those that are associated with the peer to peer lending market. As always you should consult outside help who can give you tailored advice and expertise on your portfolio.