Peer to Peer lending or also known as P2P lending investment is a system where investors lend money in exchange for interest. It is similar to what is used in a bank when a person (or company) applies for a loan. The difference is in P2P lending, the risk is placed on the shoulders of private investors, not banks or financial institutions.
Peer-to-peer lending has attracted profit-seeking investors in recent years. Are you interested in this type of investment? Before you invest in P2P lending investment, it’s a good idea to know the following:
1. Risk of Default Loans and Delay in Debt Payments
You know that P2P lending is a debt-based investment where investors lend money to individuals or businesses. You benefit from interest rates. That is, the most significant risk in peer-to-peer lending is the Borrower’s risk.
Borrower risk is the risk that the borrower will fail to repay the loan, so you lose your investment and the potential interest you may have earned. Most of these risks are closely related to the specific platforms you choose to invest in and how they protect your money.
2. No FDIC Insurance on Your Investment
Unlike investments in banks, peer-to-peer investments do not get FDIC insurance coverage. That means, you will not get reimbursed if the borrower defaults or is unable to pay off the debt.
Also, you will not be reimbursed if the peer-to-peer platform fails. Although they usually have backdoor arrangements with other institutions to take over the loan portfolio if that happens. Maybe this is one of the things you need to consider if you want to jump into P2P lending investment.
3. Investment Out
Because you invest in a loan, and the loan is gradually repaid over the term of the loan, the investment will run out to zero at the end of the given term.
If you instead spend it and don’t use it to reinvest, you won’t have any investment capital from that note when the money expires. This is an important distinction that peer-to-peer investors may need to pay attention to.
4. P2P Performance in Recession
During the last recession, peer-to-peer investing was still in its infancy. There is no definitive data that confirms how well peer-to-peer lending will perform during times of general economic hardship.
What is known is that loan performance in general tends to decline during a recession. Exactly how that will happen in the next recession is open to debate.
Even though it is risky, it does not mean that P2P investment is not safe. You can still benefit through P2P investments. By investing in that portion of the loan, you earn interest on your money. You can earn returns that are greater than the risk you took when partially funding a loan.