Risks involved in P2P Lending
If you are considering P2P lending, then you may want to first consider the possible risks associated with it. See below for some of these risks.
- Borrowers defaulting on payments: P2P loans are typically unsecured – you do not have any assets backing the loan. So if a borrow defaults on a loan, then there’s not much you can do to get your money back.
- Don’t put all of your money in one place: Many lenders will loan all of their investment to one person, or spread it out in chunks. It’s much better to diversify your loan portfolio, and lend small amounts to as many borrowers as possible. This way, if one loan defaults, you don’t lose a large percentage of your money.
- No legal precedent: There is currently no legal precedent for the bankruptcy of a peer to peer lender. For this reason, nobody really knows what would happen, should a P2P company go bankrupt.
- Interest rates can fall: If interest rates fall, many people are likely to source a more secure loan, from a bank for example – instead of looking to borrow from a P2P source.
- Regulations can change: As the peer to peer lending industry is still relatively new, legislation surrounding this form of borrowing can easily be changed. Currently, many P2P companies or groups are being regulated in a similar way to investment banks and stock brokers – who actually have little in common with P2P loans. The government could bring in a new set of rules at any time.
So, before you start investing your money in P2P lending, make sure you’re fully aware of all of the risks. Of course, all investments will carry some risks, but you need to make sure that peer to peer lending is an investment that will be rewarding for you.
Related Posts
RateSetter prepares to close the investing side of the platform →
MoneyThing enters administration →
Will a COVID vaccine improve peer to peer lending market? →
