Is P2P Lending Safe? What Are the Risks?
Like any type of investment, peer-to-peer lending platforms carry some risks. In order to have a correct financial assessment, it is important to be informed as much as possible regarding the terms and conditions offered to you. To do so, you have to always keep in touch with your platform of choice and originator.
In this article, we will determine which signs you need to look for in order to properly determine the risk of your investment in P2P lending.
Biggest Financial Risks When Investing in P2P Lending Platforms in 2021
The number 1 rule of investing is to maintain maximum control over your funds. To do this, it is important to know well the main risks when investing in p2p lending platforms:
Risk of Delayed Repayment or Debt Default
This is one of the biggest risks as it depends on your borrowers. The risk of default on the loan or delay of debt repayment deprives investors of a return at the end of the month.
How to Reduce the Risk of Delayed Repayment or Debt Default?
Invest in p2p lending platforms that have a clear indication of the different risk levels among investments. This is most often showcased through a credit score, which each borrower receives according to the regularity of his payments. That way, investors can easily judge for themselves how much return they are aiming for.
Invest in p2p lending platforms with a buyback guarantee. These platforms make sure that you will not lose your money, even if the borrower does not repay his debt. In such unpleasant cases, you will be deprived only of the right to collect the interest - without losing the outstanding principal. Compensation in these cases is key to protecting against financial risk exposure.
P2P lending platforms with reserve funds are also a good alternative. They back up investors in case of a debt default or delayed repayment. The funds are additional protection against financial risk. Although, their disadvantage is that the distribution of the resources among investors is not always equal and depends on various factors.
Diversification is always a good idea. Invest in p2p lending platforms, where each loan is distributed among multiple investors. Diversification provides an additional level of security and stability.
Risk of Platform Bankruptcy
The risk of the P2P lending platform itself going bankrupt is real. This happens when there is no good balance between supply and demand of the service. In this worst-case scenario, the remaining debts must be collected and the investments must be repaid to investors. Sadly, nobody knows how long you will be deprived of the return you expect.
How to Reduce the Risk of Platform Bankruptcy
First of all, find out more about the previous professional experience of the team that is developing your p2p lending service. Also, try to learn more about the company's financial audit in the last years of its operation.
Risk Not Having Enough Borrowers in Need or a Borrower Disappearing
Yes, this may sound strange, but there is such a risk. The direct connection with borrowers that p2p lending offers can be tricky. Check how much information you have about the person whose loan you are supporting. Also, see what is the process of the platform for selecting borrowers and background checking.
How to Reduce the Risk of Lack of Borrowers?
Invest in p2p lending platforms that work directly with lender originators and a borrower database. What does this mean? It means that investors borrow money from the borrower, who then transfers it to the borrower. Investors do NOT borrow money on the p2p lending platform. After all, investing in p2p lending platforms is not a usury system or a financial pyramid fraud. Originators are determined to do a background check of all borrowers before approving their loan applications.
For example, HelpLending works with loans granted by HelpCredit – an officially registered financial institution. By that, the platform ensures a sufficient number of borrowers who have previously passed the relevant level of verification.
How Can We Reduce the Risks of Investing in P2P Lending? Best Ways to Do This in 2021
So far, we've introduced you to the main risks to look out for and how to avoid them. As you can see, it is extremely important to choose a secure p2p lending platform. Therefore, we will reveal a few more tips on what to watch out for if you want to invest properly in P2P lending:
Transparent Model of the P2P Lending Platform
First of all, always go into detail with the conditions of your P2P lending platform of choice. The clearer they are, the better. Some platforms, such as HelpLending, allow you to control the details of the distribution of your invested amounts. This way you have the opportunity to constantly monitor how your funds are being distributed.
Authority of the P2P Lending Platform
Get to know the history of the platform, how many years it has been on the market, what is the average return on loans in it and etc. Learn more about the team and their professional expertise. This information will help you find out about the company's reputation, how reliable it is, as well as the success rate of its investors.
Regularity and Location
You have to know which authority regulates your p2p lending platform. Get acquainted with the conditions for regulation, as well as whether the activity of the platform is legal. Be cautious if the platform regulator is different from the one operating in your country.
In the case of HelpLending, all investors acquire rights from Help Credit, which gives them the opportunity to receive loan payments. This activity is completely legal in Bulgaria under an assignment agreement.
Investment Diversification
Don't invest all your money in one place - always choose several platforms and different return strategies. Platforms such as HelpLending purposefully pursue a diversification policy, so that the funds of each investor are distributed to different borrowers.
Don't compromise when looking for good investment opportunities. Add verified borrowers, loan initiators, and trustable platforms to your portfolio. That way even if one of the platforms goes bankrupt, a big part of your funds will remain safe. Good investors know that only a small percentage of their funds must be invested in p2p lending platforms, and any risk must be taken carefully and thoughtfully.
Remember that investors who take big risks and aim for higher return rates have big financial expertise.
Read more: Are p2p lending platforms safe and should you invest?
Summary: What Are the Risks of Investing in P2P Lending Platforms? What’s the Best Way to Reduce Financial Risk?
There is always a risk of bankruptcy, loan default, or late debt repayment. If you follow our advice, you can reduce these risks, but not avoid them 100%. Financially literate investors know that every investment carries risk and it can never be completely eliminated.
The most important part of investing is choosing the right platform for you and what conditions it offers to reduce these risks.
Before investing in p2p lending platforms, always read the terms and conditions. Watch out for reputable platforms with financial experience, a strong team of professionals, transparency, redemption options, and a clearly defined method for selecting borrowers. Check as much as possible the originators and their financial past. Bet on diversification of your investment portfolio! Be prudent in your investments, be patient, and do not take unreasonable risks for which you do not feel ready.
