P2P Lending risks

Is it P2P Lending safe?

Absolutely not. P2P is a risky investment and you can lose all the money you have invested. Different platforms in the past years had default problems. Like Kuetzal (January 2020), Envestio (January 2020),

Let’s check which are the main risks in investing in P2P Lending and what to do to minimize them.

Risk 1 – Buyback warranty

Some P2P platforms have a buyback warranty. In practice, some loan originator promises to buyback an issued loan if it defaults.
But what happens when a loan originator or a platform bankrupt? No one is buying back your loan.
Yes, loan originator or platform bankruptcy is an extraordinary event, but it happens and we need to consider it.

For sure the buyback guarantee is making your investments safer and reduces the risks of peer to peer lending. I am investing, where it is possible, only with a buyback warranty. It is always advised to use it.

Risk 2 – Loan originators

Some platforms, like Mintos, the biggest European platform, do not offer their own loans. They are just an interface between who issue the lending (loan originator) and the buyers (us).
Loan originators might bankrupt.

Some platforms give us the possibility to check the default payments of the loan originators. We have the possibility to choose only the best ones. Platforms like Mintos give a rating to the loan originator and we can choose what we feel convenient.

What can we do?

  • diversify our investment into different loan originators to limit our exposure.

Risk 3 – Platform bankruptcy

It is what happened to Envestio. From one day to the other the company closed and it was impossible to check their website and collect back the money

What can we do?

  • Diversify in different platforms and not invest only in one
  • Invest in platform with big capital share
  • Invest in older platform with longer history

Risk 4 – Cash drag

Cash drag happens when have money in a P2P platform, but there are not enough loans to invest in. This means that, the money does not create any interest and that we are leaving our money in an unsafe account.

What can we do?

  • Invest slowly and eventually take back money that have difficulty to be invested. Sometimes we can invest in less secured loans to decrease the cash drag, but I do not advice to do it.
  • Use autoinvest feature, if available, to invest in a loan immediately before the loan is fully invested by others

Risk 5 – Loan Quality

If there are too many investors, that is too much money available, there is the risk that the loan originator could lend money to “low-reccomended” people in order to avoid cash drag. There are always loans that don’t succeed.
Another factory is that some loans does not have a buyback guarantee.
In P2P you can have loans in different sectors, like real estate, private loan, …
I do not personally invest in car loans because car, which is usually given as guarantee, depreciates more than a house.

What can we do?

  • Choose loan with buyback guarantee
  • Choose loan type that fit to us as investors
  • Invest in secured loans with collateral, such as mortgages
  • Diversify our investment to limit your exposure

Risk – Currency fluctuation

If you are investing in currency different from your own, you will always be subjce to currency fluctuation

What can we do?

  • Invest only in our own currency

Risk 7 – General crisis

P2P lending is quite new form of investment. We do not know how it will react in case of general world or local crisis.

Conclusion

Just take into consideration that P2P lending is a risky investment. You should invest only the money that you can afford to lose. Do not invest money you need for your daily survival.
I am not a financial advisor I am just giving you my humble experience.

Let me know what you think about this article and how I could improve it.