Blog Invest Is Peer to Peer Lending Safe? A Comprehensive Guide for Beginners

Is Peer to Peer Lending Safe? A Comprehensive Guide for Beginners

date August 24, 2020 time 4 min read 790 views

Peer to peer lending can be a great way to invest your money. But is peer to peer lending safe? When considering this form of investment, this might be the first question going through your mind. Like all other investments, peer to peer loans come with risks. If you want to earn high interest, you need to learn how to mitigate the risks. We’re going to talk about all the important information you need to start getting attractive returns from P2P lending.

Peer to peer lending
Peer to peer lending (source: pixabay.com)

“Is peer to peer lending safe?”

If you talk with aspiring P2P investors, the chances that they will ask you this question are high. They want to take precautions to avoid losing their hard-earned money and getting exposed to other threats.

It’s no secret that the unsecured loans of peer-to-peer lending have their share of risks. However, there are many ways to mitigate the risks and maximize your profits. Let’s see how safe peer to peer lending really is.

What are the risks of P2P lending?

Risks of p2p lending
Risks of P2P lending (source: pexels.com)

All investments, including P2P lending, have some risks. P2P lending is unique in that it takes place on virtual platforms and the loans are often unsecured.

To reduce the likelihood of losing your money, you need to mitigate the risk by doing the due diligence before investing. The three major types of risks when it comes to peer-to-peer lending are:

1. Platform risks

Many P2P investors are most concerned with platform risks. The number of people who’ve lost their hard-earned cash to fraudulent platforms is high, and that scares would-be investors.

Once the money is lost, governments often initiate criminal investigations. Unfortunately, these activities often fail to retrieve the investors’ money.

This might make you ask, “Are peer to peer loans a good idea?”

There are chances you will run into scammers.  But many platforms know their weaknesses and actively work to improve them. And there are things you can do too.

How can you mitigate platform risks?

Before joining any platform, be sure you are dealing with a safe peer to peer lending platform. Read the terms and conditions carefully. Look for any clauses in the terms that give the platform the right to exploit you. Unfortunately, dense terms and conditions sheets are part of the territory of finance.

One simple clause you should look for is a declaration of investor resources.

If the platform does not declare that the investors’ resources do not belong to them, you could be dealing with scammers.

As a rule, make the safety of your investment a priority and know where you draw the line.

2. Borrower risk

Many borrowers are able to repay their loans, but the few that struggle to do so can cause you great financial harm.

The following are the primary criteria that lenders use to determine eligible borrowers:

  • Nationality
  • Source of income
  • Information about their job
  • Average monthly expenses
  • The number of dependants they have

But this doesn’t always paint a clear picture of if a borrower will default or not.

For example, an unexpected job loss during an epidemic or a sudden medical emergency may drastically affect a borrower’s ability to repay their loans.

The severity of the risks that you face depends on the effectiveness of credit checks that the loan originators conduct. And lenders use different systems to determine whether borrowers are eligible for loans.

How can you mitigate borrower risk?

To minimize risk, you usually should invest in many different types of loans. Create a portfolio that includes mostly safe investments to cushion you from defaults. You can also invest some of your money in secured loans.

If a few borrowers fail to repay their loans, you’ll still be able to get back your money from other more reliable borrowers. Think about your interest rate as well. You can project the amount that you are likely to lose and add it to the loan cost. The interest might drop a little, but you will be thinking about peer to peer investing in a much safer way.

3. Market risk

The market risk is the most dangerous of all of these. You cannot easily influence it and it can crash at any time, taking your loans with it if borrowers face unemployment or bankruptcy.

How to mitigate market risk?

Peer to peer lending is safe for lenders despite the risk of a poor market. If you diversify your portfolio sufficiently and invest between 5% and 15% in peer to peer loans then most sites say you are at a low risk of loss.

Is peer to peer lending a safe investment?

Is p2p a safe investment?
Is P2P a safe investment? (source: pexels.com)

If the above risks have you worried about P2P lending then you’re in luck. The safest peer to peer lending platforms all secure borrower loans with collateral.

In the case of MyConstant, we offer P2P loans backed 200% or more by cryptocurrency. If a borrower defaults, then we make sure you get your principal back and as much interest as possible by selling the collateral. Investors can get up to 7% APR and only need to lock in for 6-month terms. So if you want the steady returns of P2P investing without so much risk, come check out our platform today.

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George Schooling

George Schooling

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