P2P Lending Platforms: 7 Things Investors Should Know Before Investing
In the peer-to-peer lending world, investors potentially can get higher returns than what they can achieve from banks (via typical savings and deposit accounts). This is the primary reason why potential investors are tempted to get into the P2P industry.
However, investors need to know certain things before investing in peer-to-peer lending as this industry is associated with certain risks.
“This is not for the weak of heart,” said Mitchell Weiss, former chief executive of a commercial finance company and the founder of the Center for Personal Financial Responsibility at the University of Hartford.
So if ever you’re interested in investing in the peer-to-peer lending platform, here are seven helpful things you should know:
1. A wide range of loans to choose from
There’s a wide range of loans that investors can choose from such as student loans and loans for borrowers to install energy-efficient features in their homes. Different industries and niche areas makes this an enticing and existing way to earn a return on your investment.
2. The potentially higher interest rates means higher risks
P2P platforms normally set higher interest rates for those borrowers who they classified as “less creditworthy” based on the borrower’s credit scores and credit histories. Investors can expect a high return on their investments but they should also expect high risks accompanying this kind of set-up — like the failure of the borrower to pay the loan and a lack of any security.
3. Not all (most) platforms guarantee loans
Not all platforms are obliged to shoulder any defaulted loans made by delinquent borrowers. Even two of the largest US platforms don’t guarantee loans and said that investors might even get negative returns. Do your research and understand the terms and conditions first.
4. You can invest in partial loans
Peer-to-peer lending investors don’t have to fund 100% of a loan. They can put up a small amount of money and the platform adds it with other investors’ money to meet the borrower’s needs. This type of investment only accompanies small risks – hence the term ‘peer to peer’.
5. Diversification helps lessen risk…if you can afford it
Diversifying lending investments can minimise risks. Some platforms allow investors to pick from a range of loans or to take advantage of tools that pick loans based on specification listed by the investor. However, it is not applicable for all investors because the amount of money it takes to achieve a healthy amount of diversification is quite large.
6. Be aware of fees
P2P platforms only rely on fees they charged to both lenders and borrowers as a source of their income. So investors should expect a couple of fees, such as servicing fees and, in the case of delinquent loans, collection fees for the platform’s efforts on recovering the investor’s money.
7. The uncertainty of the status of the peer-to-peer loan during a major downturn
This matter is a major concern for P2P critics. Since the sector is new to the business scene, critics are having a hard time in telling how the platform will perform in case of a downturn.
Peer-to-peer lending platforms are regulated and investors in need of assistance may want to check out the firm’s credentials starting with the FCA (Financial Conduct Authority) register. Better still, contacting the firm’s support and help services and reading their FAQ’s would be a good start.
Take a look at our Frequently Asked Questions to get a better handle of this type of lending opportunity.