P2P investing myths: Separating fact from fiction

Today’s investors have an extensive range of investing options. Of all of them, modern peer-to-peer (P2P) lending platforms are gaining the most traction in terms of growth and popularity. 

This investment model has broken down the traditional borders of investing. P2P investing has become one of the fastest-growing alternative investment vehicles providing investors with diversified portfolios and delivering high returns.

However, as with all financing aspects, P2P investing has been associated with certain risks and push-backs, particularly by misunderstood individuals and media commentators. 

A fair share of P2P investment scams have led to a rise in so-called P2P investing myths. Yet how justified are these myths? 

Here are some common myths about P2P that need debunking.

Peer-to-Peer investing is the new fad

While the history of P2P investing in loans has been brief compared to traditional investment vehicles, there has been nothing but increased growth in investor demand since its arrival. This sector is not a fad or passing trend but in its coming of age.  

Consider this; the P2P market is set to be worth more than $44 billion by the year 2024. The innovation that P2P brings by using more innovative and automative technology naturally appeals to a growing number of tech-savvy people. 

Peer-to-Peer investing is only for risky borrowers or millennials

Because of its technological innovations, there is a misconception that P2P investing is only used by the younger generations. 

While millennials increasingly turn to P2P investing platforms for their ease and convenience, the belief that it’s a sector dominated by a ‘tech-savvy generation’ is incorrect. 

Whilst it’s true that over half of P2P investors are millennials, a sizable 36% of them are aged 38+, debunking the myth that P2P investing is for the younger generation only.

Income is not guaranteed

The principle “the higher the return, the greater the risks” usually implies either a sizable return on your investment or you could lose it all. 

Thus, newer and possibly smaller investors prepare for the worst, investing under the most favourable conditions. 

Attracting investors with high interest rates, a P2P platform may turn out to be a scam, as happened with the platform Ezubao, that stole $7.6 billion from investors in 2015.

Such levels of deceit and fraud instantly attract negative headlines for the P2P industry. However, such scams are not a common trend for the P2P market. This is due to the rise in investment packaging, which is one method that is widely used to avoid such high risks. 

Investment packaging is money invested in several loans instead of one and minimises borrower defaults. 

Plus, most (not all) P2P platforms provide a Buyback Guarantee to their investors, allowing them to compensate for overdue or default loans should the loan originator not pay. This guarantee still allows investors to obtain some returns rather than losing their capital.

So, non-guaranteed income is another myth.

The Peer-to-Peer industry is not regulated

In the UK, for example, the P2P sector has been regulated by the Financial Conduct Authority (FCA) since 2014. Over the past years, P2P has integrated into the global financial services industry and is recognised as a legitimate investment vehicle. 

All serious platforms in the P2P lending market have received licences from their local financial authority, protecting their customers’ interests. 

However, the EU implemented new Pan-EU legislation in November 2021, where platforms within the trading bloc must obtain their licences by November 2022.

Before choosing any P2P investment platform, check that the company has been granted a licence from their regulatory authority. 

Peer-to-Peer platforms are risky for investors

Investors must realise that there is an element of risk with P2P investing. However, the P2P sector caters to varying levels of risk. Some platforms offer few P2P loans to invest in, others provide a diverse risk portfolio. 

Investors should understand why diversifying is critical and determine how the P2P platform can recover their money should a loan become overdue or default entirely. Reputable P2P lenders will provide a Buyback guarantee to guard against capital losses.

It would help if you had a lot of money to get started 

Whilst some types of investments require a lot of funds to get started, P2P investing is accessible to most income levels. The investment returns vary depending on the type of loan, the loan conditions and the degree of risk. 

Most investors can easily make a low-amount entry into the P2P investing space. 

Many P2P platforms provide investors with high transparency and control, where investors can choose which rates they are attracted to. 

I have no control over auto investing

Auto Invest is a feature that replaces the manual selection of loan picking and investing. 

To activate Auto Invest, an investor must create a portfolio with specific criteria suitable for them.

After completing the portfolio, the platform automatically selects and invests in loans that meet these requirements. Investors can make changes, pause, or create multiple portfolios anytime. 

This means that investors have full control over their P2P investments, manually or through auto-investing.

Whether you are a professional investor with a clear strategy or a novice to the world of P2P investing, remember that being informed is key to succeeding at peer-to-peer lending. 

P2P is easy money

High interest rates and returns make P2P investing attractive to investors. For many, this creates a myth that these high returns (or income) will incur expensive operational fees, including transactional fees, website maintenance fees, and withdrawal fees.

However, several platforms have attained the belief that sustainable, long-term investments can provide regular income rather than the lure and enticement of high returns.

Whilst platforms like ours never promise easy money and high returns, we believe in offering a better balance between profitability and risk, so that investors can count on returns.

With other features like the buyback guarantee and secondary markets, platforms can inspire confidence in P2P investing.

P2P myths debunked

Whilst a consumer needs to research before using any financial service, P2P investing could be considered a safer and less risky alternative to other types of alternative investing. 

Despite this, many media discourses present P2P investing as risky because of a few unscrupulous cases that have tainted the industry. 

Yet many of these claims are unsubstantiated. The few instances have led to greater transparency within the P2P industry.

Thus, many of these common myths about P2P lending are no longer valid. At MoneyHub, we aim to educate consumers to consider the benefits of P2P investing as the industry continues to increase in popularity.