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16/07/2022

Risks related to P2P Investing

Table of content

Introduction

Creditors' risk

There is a high degree of currency risk

The loan originator's risk

The risk of using a given platform

Is P2P lending a smart alternative to traditional bank financing?

Summary

Introduction

Without the involvement of a formal financial institution, a peer-to-peer loan is a form of direct investing in individuals or enterprises. P2P lending is typically done via internet platforms that connect lenders and borrowers.

Loans can be secured or unsecured through P2P lending. However, the vast majority of P2P loans are personal loans that are not secured by collateral. Loans backed by luxury products are extremely rare in the industry. Peer-to-peer lending is regarded as an alternate type of finance because of its distinct properties.

When it comes to investing, there is always a degree of risk involved.

However, how much risk is too much?

Where does one draw the line, and how do you know when you've crossed it? To minimise risk while maximising reward, how might peer-to-peer lending be structured?

Investors should ponder these issues carefully before making a decision. What's more, they're critical questions to ask yourself while you're thinking about buying something new.

Creditors' risk

When it relates to P2P lending, there is always the possibility that the borrower will default on their loan.

There are two possible outcomes when you make an initial deposit into the account and begin investing:

  • The borrower repays the loan in full at the end, as well as you end up receiving their principal and interest.

  • Repayment of the loan has been put off. Depending on the platform, the loan may be reimbursed after a certain amount of time has passed.

As long as the borrower pays on time, you won't have to worry about losing any money – because, with our site, we can pay back both the interest and principal.

There is a high degree of currency risk

Currency fluctuations and transfer fees are two of the most significant sources of currency risk. When opening an account in a foreign currency, keep in mind the exchange rate and any other fees your bank may impose. Platforms such as Mintos offers loans in multiple currencies.

Customers can open a Euro as well as a British Pound account on this website. The Wise platform, with which we've partnered, allows investors with other currencies to invest at a very low cost.

Many issues can arise if lenders, borrowers, or the platform itself is not well prepared and prepared to deal with the money issue. Because you did not prepare a realistic investment budget, you risk over-or under-financing your project. As a result, the project's progress could be significantly hampered, and it could even fail.

 

There are fewer laws and conditions in place during the initial stages of crowdfunding, thus issues might surface more quickly.

The loan originator's risk

Loan originators are a common source of funding for many P2P platforms.

Companies that manage borrowers include loan originators (LOs), which find borrowers, ensure they pay on time, and collect interest payments.

If a loan originator's business is mismanaged or suffers a large number of credit defaults, there is a chance they will go bankrupt. Because of this, investors must also check the financial statements of a loan originator. As for majority of platforms, for example, Robocash and Bondora are directly connected to their loan originators, it is worth to take a look of a financial report for the whole group.

Most platforms offer loan repurchase, but there is still a loan originator concern when investing in Peer to peer loans.

The risk of using a given platform

A platform's insolvency is a real possibility, just as it is for any other business. Leading to a shortage of investors and loans, a lack of proper platform management and/or an excessive number of credit defaults, this may be the case.

Investors may lose their money if the platform declares bankruptcy in this situation.  In some peer to peer lending platforms, investors still retain the right to assign their debt and would be able to continue pursuing the borrower.

All of the loan assignments are transferred and held by the investor immediately once they are funded. As a result, even if the p2p site goes out of business, your investments will remain yours.

The annual interest rate on the loan originator’s European loans is larger than the return investors obtain from the Peer-to-Peer platforms.

As a result of this high margin, platforms are able to cover operational costs and the cost of risk, which is why most of them are offering investors 14-16 percent.

Is P2P lending a smart alternative to traditional bank financing?

P2P lending has become a popular technique for raising startup funding for new businesses and individuals with big dreams.

In contrast, the concept of P2P lending is a newish one. As a result, thoroughly weighing the advantages and disadvantages is critical.

A business owner must thoroughly investigate the parties he or she works with as well as find out just how they approach issues such as the law or regulation. You also need to carefully consider your specific credit requirements and critically evaluate your strategy.

A preliminary study can help you save money in the long run. Investors must carefully choose the projects they intend to invest in and which platform they intend to use.

Platforms for peer-to-peer lending have the responsibility of closely monitoring and evaluating both borrowers and investors.

The regulations and laws governing P2P lending must also be monitored to make sure they are solid.

Summary

With peer-to-peer lending, the good news is that by choosing a platform that is accessible, properly registered, and in continual communication with its investors, you may significantly lower the danger of your financial investment. 

Also it is worth to mention that losses in Peer to Peer lending can be significantly reduced investing the right way and avoiding mistakes. Read the article about Most Common P2P Lending mistakes to find out how to make right decisions in P2P Lending!

Despite the risks associated with the peer-to-peer lending sector, we seek to empower as well as educate the investors so that they always feel confident in the decisions made with which they entrust their money.

Once you've completed your risk analysis of peer-to-peer lending, we'd love to have you as a member of our investment community.