Peer to peer lending is a relatively new model for financing. The past five years have seen a tremendous surge in the popularity of this model and its ever-increasing still. These new platforms have paved the way to a fair and competitive market that provides a challenge to the traditional banking monopolies.
However, as with any model, even peer to peer lending comes with its risks.
Here are the risks you will have to watch out for when opting to start a peer to peer lending:
Late payments or defaults
If you already have an idea about how peer to peer lending works than you should know that it does not come short of its risks. A borrower or a series of different borrowers to whom you have lent your money may delay or stop payment on a loan. Worst case scenario- they may default on a loan, and you may lose your investment. This will result in you suffering from financial loss or lower value for your money given the borrower makes late payments or is unable to pay.
To protect yourself from such a risk, you should briefly research the company you are investing in and make sure it has a good credit score before you start a peer to peer lending.
Borrowers creditworthiness may vary over time
Given you know how peer to peer lending works, you should also be aware of the risk that on an ongoing basis a borrower’s creditworthiness may decline. Although you start a peer to peer business lending based on the creditworthiness of an individual or a business, your investment will be affected if this changes over time. This will again result in you suffering from a significant financial loss.
Again, it’s better to lend to businesses that to individuals because firms usually exhibit higher credit scores and are safer.
You may lack in diversifying
Given you are a beginner here is a tip. Always invest small amounts in different businesses rather the put all your money in one enterprise. This will allow you to diversify your investment portfolio and lower risks. If you invest all your money in one business without considering that if the business goes bankrupt, you may lose all your money.
Therefore, you must spread all your money across different platforms and be safe while engaging in peer to peer business lending. As a rule, invest in 6-12 peer to peer lending sites so you can reduce bad debts and have a healthy profit.
Peer to peer lending sites may go bad
Because of modern technology gaining rapidity and better platforms peer to peer lending risks have a lower impact these days. However, there still exist risks such as ‘platform risks’. If one of the peer to peer lending websites that you use collapses, there is a substantial risk that you may suffer from delayed payments or lose all your money in one place.
Although the possibilities of these kinds of collapses are low, they are not inevitable and you should use different sites to back up your investments and be secure. Even if this happens you will have to take out insurance, and in case something happens you can still recover a portion of your losses.
Here are the major risks that you may face when beginning peer to peer lending. Although the possibility of such risks is relatively low, given that the process is becoming more and more secure, you do not have to worry a lot. However, make sure that you are aware of the threats and always analyze credit scores.