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 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. (more…)
Continue Reading It’s never a guaranteed form of savings, and you never know when your P2P lender could go bust