Disadvantages for lenders
- Many lenders view peer to peer lending as a form of savings. This perception can be dangerous, as peer to peer lending does not come with a safety guarantee. It should be viewed and treated as an investment, with the necessary caution, as there is always the risk that you could lose all of your money if your borrower can’t pay. As there’s no intermediary party, you are exposed to much higher risk if your borrower defaults.
- Savers are attracted by the high-interest rates, and many get persuaded to lend to higher-risk borrowers owing to the higher rate of return. The higher the borrower’s risk of defaulting, the higher your risk of losing your money, too.
- Another risk to consider is whether your borrower repays your funds either early or late, which can damage your profits. If a borrower repays your loan early, you can lend the money out again through the website to a different borrower, but there is always the risk that you aren’t able to lend out at the same interest rate.
- It can take time for the company to lend out your funds, and you won’t accumulate any interest in this period. This is something to bear in mind for significant investments, when it may take days to lend it all out.
- There may come a time where you need the savings that you’ve invested in a peer to peer lending platform, particularly as one- to five-year loans are the standard. If you withdraw your funds early, some schemes charge a significant early-withdrawal fee. On some platforms, you may not be able to remove your money at all during the loan term. You may be additional hints able to sell the loan on to release your capital, but you will also incur a fee for this, and it may take more time than you can afford to wait.
- Another thing to watch out for is that the rate lenders quote is not always guaranteed. Peer to peer lending companies will quote expected returns for investors, perhaps referred to as projected or target returns, but the actual rate you get could be less. A borrower might repay your loan early, or not at all, and if there’s no provision fund to cover the non-payment, then you could lose some of your investment.
- There’s less liquidity than stocks or bonds owing to the extended loan terms, usually between one and five years.
- Not all investors are eligible on all sites, as some restrict access to accredited investors only.
- Lastly, peer to peer lending is still a relatively new phenomenon, only coming onto the scene in 2005. In , Lendy, a mid-sized peer to peer lending platform, collapsed, costing 9,000 investors up to ?90 million. Lendy collapsed despite regulation by the FCA, demonstrating the unpredictability of the industry and the risk to investors.
Final thoughts & FAQs
Often hailed as one of the most innovative forms of investing and borrowing to come out of the last twenty years, P2P lending has seen a steep rise in popularity in the last decade that shows no signs of slowing down. By circumventing the conventional loan requirements and traditional funding routes, this form of finance offers competitive rates for lenders and borrowers alike.
As with any form of investment, P2P lending comes with significant risks. That said, the market offers impressive growth rates and is a fantastic way for start ups to source their initial seed funding. For individuals, it’s also a more accessible way of getting credit, bypassing traditional admin-heavy routes. It is therefore worth considering next time you’re looking for quick access to a loan or an easy way to grow your funds.