Is P2P lending safe? How to lower the risks?


Regardless of the attractiveness of P2P lending, investors are becoming increasingly aware of the potential risks as well as the safety of P2P lending platforms. Is P2P lending safe? Is it a good investment opportunity?

 

The very short answer is: Yes!
– but you should get familiar with the potential risks when lending your hard-earned money on these platforms.


Let’s dive into it… 🙂

Risks associated with P2P lending

 

Risks associated with the P2P platforms can appear in different areas of the lending process. My answer to “is p2p lending safe?” starts with an understanding of the platform itself.

Platform risk

 

p2p lending trust

 

Platform risk can be considered in terms of the platform trustworthiness.

In a technological era, starting an online lending platform is actually a rather easy process. Thus, there is always the risk of someone exploiting this opportunity through malpractice.

 

Therefore always make sure that you lend your money through a platform with a proven track record.

For example, you can follow my investment portfolio and see my returns and experiences. I have invested in selected P2P lending platforms since 2017 and follow the p2p lending market closely.

Furthermore, you can also join some general discussions such as the facebook group P2P Investment Fellows. The question “Is peer to peer lending safe?” would be a great topic to discuss 🙂

Finally, also look into other investor experiences/reviews on Trustpilot and online forums such as P2P Independent Forum.

This will help you and give you an insight into the overall trustworthiness of the platform.

Credit risk and diversification

 

Credit risk is a risk present whenever one party lends money to another party.

 

This is the risk that the borrower will default and the investor (lender) will not get the money back.

If the borrower defaults on his loan, you stand to lose a big portion, if not all, of your money. However, this risk can be reduced…

Diversification

 

One way to reduce the occurrence of this risk is to disburse your funds (diversify) to a larger number of borrowers.

You should lend smaller amounts to a larger number of borrowers. That’s what I do and it works great.

I only invest (lend) between 10 and 50 euros in each loan. Thereby, I have only a very small share of the loan and the credit risk is reduced.

 

You should also choose investment opportunities with buyback guarantees since most platforms offer this.

Then you are much more protected against any loss of the investment. I will uncover more buyback in the next section:

Lack of protection scheme

 

P2P lending protection

 

Lack of protection scheme is maybe one of the biggest risks associated with P2P lending.

It’s a bit like living without an emergency fund for unexpected and difficult times.

If you put your money as a deposit in a bank, in the case of bank failure, your money is guaranteed by the Deposit Guarantee Schemes. In general, this is not the case with P2P lending and you should be aware of that.

While many of the P2P lending platforms have set up some form of protection, such as buyback guarantees if the loan defaults, there are still platforms without adequate protection schemes for investors.

One of the biggest is Bondora and they do not offer buybacks. For that reason alone, I have chosen not to recommend that platform at all.

Personally, I only use and recommend p2p platforms with 100% buyback guarantees and in the unlikely case scenario that the platform goes bankrupt, the agreement still exists.

 

The buyback guarantee is just like an extra layer of security, where it’s very often the loan originator on the platform who will repay a loan to you after 60 days delay.

I think it’s really great, that most platforms offer this and it makes the investment less risky.

 

Also, you can look for platforms which have defined a plan with which they will be able to continue the process of collecting payments from borrowers even if the platform is going out of business.

Statements from recommended platforms

 

One of the platforms I personally use is called Fast Invest. They have stated that investors are secured through the loan agreement and will be paid back even if the platform stopped.

Another platform, actually the biggest peer to peer lending platform in Europe, is Mintos.

 

Martins Sulte from Mintos

 

I asked the CEO, Martins Sulte about this topic (is P2P lending safe?) and he answered:

 

 

“Investing always puts your capital at risk. This is true for all investments – not just Mintos. On Mintos, investors can find all the information about loans and lending companies that can help them make sound investing decisions.

 

We analyze the organizational and financial stability of the companies before they join the marketplace. We check their financial statements, underwriting policy, and risk management. Result of this process is Mintos Ratings, and these risk ratings of the lending companies are fully visible when investing in Mintos.

More than 95% of the loans on our marketplace come with a buyback guarantee. This means the lending company will buy back the loan and pay the interest if the loan is more than 60 days late.

We have hundreds of thousands of loans on our marketplace and this variety is a great opportunity for the portfolio diversification. Investors can buy small fractions of many loans, starting from 10 EUR. This allows investors to create a fully diversified portfolio, which helps the reduction of the risk and earns more stable returns.

Together, these factors are strong support for the Mintos investor protection.”

Alla Kisika from Grupeer

 

Co-Founder Alla Kisika from the European platform Grupeer also answered the “is p2p lending safe?” question:

Alla Kisika Grupeer

 

“When we talk about investing, it is very important to bear in mind that any investment is not 100% safe. Even if you invest in US government bonds or put your money on the deposit account with the biggest/safest bank, there are risks involved.

The investment yield, in fact, is the payment to an investor to compensate for such risk. Higher the risk, higher the yield in theory. In practice, there are some deviations from equilibrium, where the higher yield can be received for the not so high risk, or vice versa.

The European commercial banks, for example, offer negative interest rate at the moment. Whilst p2p lending platforms offer quite high investment return, whilst the risks are minimized.

The p2p lending platforms are a relatively new asset class, so to prove themselves, the p2p lending companies are trying to show to their clients that investing in business loans or funding the real estate development project is safe, by doing extra due diligence, monitoring or actively participating in the portfolio of its loans.

Besides that, the p2p lending company is actively working with the loan originators that are featured on the platform. This means that the partners are going through many financial and legal checks, have some stake in their own deals – “skin in the game”. The risk management varies from company to company, so it is important to choose a platform, which has a predefined scenario in case the defaults have happened.

At Grupeer all deals are secured with BuyBack guarantee- this is one of the keys conditions when we cooperate with loan originators.

Peer to peer lending can be safe when an investor chooses responsible peer to peer investment platform, which satisfies the criteria mentioned above. Also, don’t forget the golden rule of any investment – diversification.”

 

The statements are completely in harmony with my own view on p2p investing and how to secure your investment. Thumbs up 🙂

It should also be noted that there are steps taken by the regulatory bodies for the purpose of ensuring that all P2P platforms will have some form of protection scheme in the future. This is a great step that hopefully will take place in the near future and makes it safer.

Technological risk

 

Platforms are paying special attention to reduce and even eliminate (if possible) the technological or cybersecurity risk. Nevertheless, you should check the basic technology used by the platform.

Maybe you think how? Let me share a few tips 🙂

 

➀ Check if the website has a lock beside the website address in the browser:

 

SSL reduce the risk and protect the platform

 

This lock means the website has SSL protection and encrypts the link between a web server and a browser. In other words: That the site is trusted and secure. Just like this blog 🙂

 

➁ Check if they use Google two factor authentication or reCAPTCHA.

They work as an extra layer of protection and look like this:

 

Google reCAPTCHA protection

Platform volume 

 

When evaluating the platforms, make sure that they have enough demand and supply for funds (volume).

Here is an example of a positive development of loans funded at Mintos (January to September 2019):

 

Mintos loans funded

 

If you invest your money in a platform with a low level of borrowers or low demand for funds, your money could be idle.

You want your money to work for you and be in an investment agreement rather than on an investment account.

Regulation of P2P lending platforms

 

P2P lending platforms have become a significant player in the financial markets.

As such, they could pose a risk for the markets as well as the economy if they are not regulated.

Currently, the regulation for P2P is less strict compared with the regulation set in place for other financial institutions such as banks.

Nevertheless, countries have started to create and implement adequate regulations which will control the activities of P2P platforms. These new regulations are increasing the protection level for investors, thus making the P2P lending safer.

 

Regulation in the UK

 

The regulatory authority responsible for P2P platforms in the UK is the Financial Conduct Authority (FCA). The FCA has the responsibility of evaluating each P2P platform and approve that they could conduct their activities. One goal of the FCA is to enhance the regulatory framework and define the action taken when a platform is faced with failure.

 

Regulation in Australia

 

P2P platforms in Australia are subject to the legislation set under Management Investment Scheme (MIS) framework. Consequently, because of the industry in which P2P platforms operate as well as the financial products and services they offer, under the Australian regulation, they should obtain two separate licenses. P2P platforms in Australia should have an Australian Financial Services License and Australian Credit License.

 

Regulation in the United States

 

In the United States, the regulation is defined from an investors side of the transaction and the borrowers’ side. More precisely, P2P lending platforms should adhere to regulations set by the Security and Exchange Commission (SEC) and legislation defined by the Consumer Financial Protection Bureau and the Federal Trade Commission.

Countries are moving in the right direction when it comes to the protection of your funds and the regulation of P2P lending activities and procedures.

The P2P lending market is in very positive development and will in time be very established as an investment opportunity like stocks and bonds.

 

Remember my friend that there is no such thing as an investment without risk 🙂

Nonetheless, there are investments in which you can invest your money and control most of the risks. One such an investment is to lend your money through P2P platforms. I really like this investment opportunity.

This type of investing is safe because the regulation for crowdfunding platforms is updated and implemented on a regular basis.

In addition, an effort from your behalf could increase the safety of these investments as long as you are not becoming greedy. Thus, it can be concluded that improvements in regulation and smart lending are making P2P lending platforms safe.


That’s it.
I hope you enjoyed this great article about “is p2p lending safe?”. Lending money through P2P lending platforms can be a rather profitable venture if you do it in the right way 🙂

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Peter Michael

I'm an investor and the blogger behind My Investment Blog. I write about investment, financial independence, personal finance, and personal development. I try to combine the topics and show my journey towards financial freedom.

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