{"id":7034,"date":"2024-12-24T17:20:20","date_gmt":"2024-12-24T15:20:20","guid":{"rendered":"https:\/\/moneyhub.ee\/?p=7034"},"modified":"2025-04-22T13:40:36","modified_gmt":"2025-04-22T11:40:36","slug":"p2p-lending-risks","status":"publish","type":"post","link":"https:\/\/moneyhub.ee\/en\/useful\/articles\/p2p-lending-risks\/","title":{"rendered":"How risky is P2P lending? [And how to manage the risk]"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"7034\" class=\"elementor elementor-7034\" data-elementor-post-type=\"post\">\n\t\t\t\t<div class=\"elementor-element elementor-element-1c593188 e-flex e-con-boxed e-con e-parent\" data-id=\"1c593188\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-4679fe93 elementor-widget elementor-widget-shortcode\" data-id=\"4679fe93\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\"><nav aria-label=\"breadcrumbs\" class=\"rank-math-breadcrumb\"><p><\/p><\/nav><\/div>\n\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-255b5cbb e-flex e-con-boxed e-con e-parent\" data-id=\"255b5cbb\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t<div class=\"elementor-element elementor-element-7e32f760 ddddf e-flex e-con-boxed e-con e-child\" data-id=\"7e32f760\" data-element_type=\"container\" data-e-type=\"container\" data-settings=\"{&quot;background_background&quot;:&quot;classic&quot;}\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-1c5ff3a9 elementor-widget elementor-widget-heading\" data-id=\"1c5ff3a9\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">How risky is P2P lending?<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-725bcb4d e-flex e-con-boxed e-con e-parent\" data-id=\"725bcb4d\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-62a2e6cd elementor-widget elementor-widget-image\" data-id=\"62a2e6cd\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"image.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<img fetchpriority=\"high\" decoding=\"async\" width=\"2240\" height=\"1260\" src=\"https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png\" class=\"attachment-full size-full wp-image-7036\" alt=\"p2p laenud\" srcset=\"https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png 2240w, https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-300x169.png 300w, https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-1024x576.png 1024w, https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-768x432.png 768w, https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-1536x864.png 1536w, https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-2048x1152.png 2048w\" sizes=\"(max-width: 2240px) 100vw, 2240px\" \/>\t\t\t\t\t\t\t\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t<div class=\"elementor-element elementor-element-221ba0cc e-flex e-con-boxed e-con e-parent\" data-id=\"221ba0cc\" data-element_type=\"container\" data-e-type=\"container\">\n\t\t\t\t\t<div class=\"e-con-inner\">\n\t\t\t\t<div class=\"elementor-element elementor-element-54bf36a4 elementor-widget elementor-widget-heading\" data-id=\"54bf36a4\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"heading.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t<h2 class=\"elementor-heading-title elementor-size-default\">As with any investment, there are risks to investor capital. The trick is to manage P2P lending risks so that investments are both lucrative and safe.<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<div class=\"elementor-element elementor-element-6b0424b5 elementor-widget elementor-widget-text-editor\" data-id=\"6b0424b5\" data-element_type=\"widget\" data-e-type=\"widget\" data-widget_type=\"text-editor.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t\t\t<p><span style=\"font-weight: 400;\">If you are looking for risk-free investment opportunities, prepare yourself to be disappointed. Despite how wonderful they sound, there are no risk-free investments.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">The fact that investing is not risk-free should not discourage investors from looking into alternative investment opportunities, provided they know how the investment works in detail and the specific risks.<\/span><\/p><p><b>Post summary:<\/b><\/p><ul><li aria-level=\"1\"><b>Is P2P lending safe?<\/b><\/li><\/ul><ul><li aria-level=\"1\"><b>The 3 risks associated with P2P lending<\/b><\/li><li aria-level=\"1\"><b>5 tactics to manage P2P lending risk<\/b><\/li><\/ul><h2><span style=\"font-weight: 400;\">Is P2P lending safe?<\/span><\/h2><p><span style=\"font-weight: 400;\">Investing and risk are like a relationship; you cannot have one without the other. Just like a relationship, some are more volatile than others.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Therefore, investing in P2P lending through peer-to-peer platforms comes with a certain level of volatility in your investments.<\/span><\/p><p><span style=\"font-weight: 400;\">Most P2P lending online platforms are regulated by local authorities rather than at an international level.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">However, since P2P lending has become such a cross-border industry, investing in a platform regulated by an authority different from your home country is potentially risky.<\/span><\/p><p><span style=\"font-weight: 400;\">One of the most significant advantages of P2P lending platforms is their level of transparency. Many fully disclose how investments&#8217; security and legal structure work and are committed to making P2P investing better and safer.<\/span><\/p><p><span style=\"font-weight: 400;\">This, in turn, increases the platform&#8217;s trustability and provides investors with valuable historical data about loans and their average returns.<\/span><\/p><p><span style=\"font-weight: 400;\">Sadly, several P2P platform <a href=\"https:\/\/moneyhub.ee\/news\/scamming-update\/\">scams<\/a> have knocked investor confidence in using reliable and trustworthy peer-to-peer lending businesses.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Still, you can determine which to use if you do your homework on the platform, and most platforms are audited regularly.<\/span><\/p><p><span style=\"font-weight: 400;\">Investors can then mitigate risks through safeguards, including a buyback obligation and viewing only higher-quality<a href=\"https:\/\/moneyhub.ee\/money\/loans\/\"> loans<\/a>.\u00a0<\/span><\/p><h2><span style=\"font-weight: 400;\">Risks associated with P2P lending<\/span><\/h2><p><span style=\"font-weight: 400;\">The risks of P2P lending can be categorised into three groups:<\/span><b><\/b><\/p><ul><li aria-level=\"1\"><b>Loan defaults and late repayments of the debt<\/b><\/li><\/ul><ul><li aria-level=\"1\"><b>A loan originator going bust<\/b><\/li><\/ul><ul><li aria-level=\"1\"><b>The P2P platform itself going bankrupt<\/b><\/li><\/ul><h3><span style=\"font-weight: 400;\">Loan defaults and late repayments of the debt<\/span><\/h3><p><span style=\"font-weight: 400;\">P2P lending is a debt-based investment where investors lend money to individuals or businesses in exchange for a reasonable return on their capital investment.<\/span><\/p><p><span style=\"font-weight: 400;\">The borrowers themselves, to whom the investors have lent money must make the loan repayments. However, there are times, particularly during difficult economic circumstances like the COVID-19 pandemic, when borrowers default on making payments or the entire loan.<\/span><\/p><p><span style=\"font-weight: 400;\">As the investment returns are dependent on the borrower making these repayments, all of a sudden, your P2P investment no longer makes any returns for you.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">However, this risk can be mitigated if investors use a platform or only lend to borrowers who provide underlying collateral to the loan. So, if a borrower defaults, the collateral can be sold to provide the returns investors seek.<\/span><\/p><p><span style=\"font-weight: 400;\">Other platforms provide buyback guarantees.<\/span><\/p><p><span style=\"font-weight: 400;\">So, the outcome of a loan default or late repayment differs from platform to platform.\u00a0<\/span><\/p><h3><span style=\"font-weight: 400;\">A loan originator going bust<\/span><\/h3><p><span style=\"font-weight: 400;\">In P2P lending, a <\/span><i><span style=\"font-weight: 400;\">Loan Originator<\/span><\/i><span style=\"font-weight: 400;\"> (LO) is an entity that acquires borrowers looking for a loan.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">A loan originator&#8217;s role is to provide borrowers with the P2P platform, which only needs to focus on administration and acquiring lenders.<\/span><\/p><p><span style=\"font-weight: 400;\">This means that investors lend money to a loan originator instead of directly to a P2P platform. The LO then passes this money on to the borrower.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">The LO also collects all repayments from the borrower, who pays the lenders (investors) via the platform.<\/span><\/p><p><span style=\"font-weight: 400;\">As this form of peer-to-peer lending occurs outside of the platform, it provides the business with a streamlined lending model to find newer loans to offer investors.<\/span><\/p><p><span style=\"font-weight: 400;\">Sadly, the platform does not guarantee the liquidity of the LO, which means if they go bust themselves, investors are once again left short.<\/span><i><span style=\"font-weight: 400;\">\u00a0<\/span><\/i><\/p><p><span style=\"font-weight: 400;\">Whether <a href=\"https:\/\/moneyhub.ee\/money\/loans\/\">lending or borrowing money<\/a>, P2P investors must trust to whom they are lending money so that they will not lose capital or interest repayments should the loan originator go bankrupt.<\/span><\/p><p><span style=\"font-weight: 400;\">Hence, even if the loan is through an LO, an excellent P2P lending platform must ensure investors are not impacted by extensive due diligence.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Due diligence should include financial and legal analyses in approving loan originators to their platforms to minimise the risk of collaborating with a sub-par loan provider.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Some platforms even have LOs who keep a certain percentage of their loans. If they do this, they will have something at stake and are more incentivised to take new loan originator approval seriously.<\/span><\/p><p><span style=\"font-weight: 400;\">Investing in loans through loan originators is a risk, but that does not mean it should be avoided, as they can provide some high-yield returns.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">As always with most investing, ensure you diversify your investments across various loan originators. This will make you less vulnerable to possible bankruptcy should one of the loan originators fail.<\/span><\/p><h3><span style=\"font-weight: 400;\">P2P platform itself going bankrupt<\/span><\/h3><p><span style=\"font-weight: 400;\">Like typical businesses, P2P lending platforms need to make more money than they spend; otherwise, they will lose business and may have to close.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Put briefly, the P2P lending platform you use to invest through could go bankrupt.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Should this occur, the P2P platform will accumulate the remaining debts from its borrowers and settle with tier creditors, namely any outstanding investors.<\/span><\/p><p><span style=\"font-weight: 400;\">To avoid being one of the investors who has lost money on a bankrupted P2P platform, always thoroughly audit the company&#8217;s financial health.<\/span><\/p><p><span style=\"font-weight: 400;\">Read third-party reviews and avoid those that do not publish their audited accounts. This will minimise any risk to your potential investment in a P2P platform.<\/span><\/p><h2><span style=\"font-weight: 400;\">Managing P2P lending risk<\/span><\/h2><h3><span style=\"font-weight: 400;\">1. Diversify your P2P platform portfolio<\/span><\/h3><p><span style=\"font-weight: 400;\">Diversifying investments across multiple loans, loan originators, and even P2P loan platforms is the best way to minimise the risk involved in managing peer-to-peer lending.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Doing this will help lower an investor&#8217;s overall exposure to loan defaults, whether a peer-to-peer lending platform or a loan originator.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Suppose the P2P lending platform you are investing through is an aggregator of loan originators. In that case, examine<\/span><b> each loan originator&#8217;s financials <\/b><span style=\"font-weight: 400;\">before selecting them to invest in.\u00a0<\/span><\/p><h3><span style=\"font-weight: 400;\">2. Diversify investments through other platforms<\/span><\/h3><p><span style=\"font-weight: 400;\">Experienced investors would never &#8216;place all their eggs in one basket.&#8217; And this is the same for those looking to grow their capital.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Unless you have a very high-risk tolerance and are a real expert in peer-to-peer lending, only a small section of your portfolio should be on one platform.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Spreading the risk amongst platforms and loan originators will also avoid the pitfalls should one suddenly become insolvent.\u00a0<\/span><\/p><h3><span style=\"font-weight: 400;\">3. Avoid being enticed by high rates and search for strict criterion platforms<\/span><\/h3><p><span style=\"font-weight: 400;\">Investors can immediately lower their risk significantly by opting for P2P lending platforms that are strict with whom they lend.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Platforms should also underwrite a loan&#8217;s credit, affordability, identity, and possible fraud of borrowers before being accepted to the platform.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">That said, even borrowers with excellent credit scores might end up in a situation where they cannot repay their loans.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Even though good credit scores can reduce the likelihood of a loan default or late debt repayments, investor risk can never be eliminated.<\/span><\/p><h3><span style=\"font-weight: 400;\">4. Use P2P platforms with Buyback guarantees<\/span><\/h3><p><span style=\"font-weight: 400;\">A buyback guarantee is an agreement between a lender and the loan originator or P2P lending platform.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Suppose the borrower is late with or misses a loan repayment for a certain number of days; the loan originator or platform must buy back the loan from the lender.\u00a0\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">The peer-to-peer platform can buy the loan back either fully or partially. Many loan originators offer their type of buyback guarantee with different terms.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">For instance, the days of payment delay accepted before a loan is repurchased might vary. Still, it is usually 30, 60, or 90 days.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Some buyback guarantees will reimburse investors for the outstanding capital and either partly or in their entirety all interests and fees.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Others will only compensate a portion of the loan and its costs and interest.\u00a0<\/span><\/p><h3><span style=\"font-weight: 400;\">5. Invest in collateral-backed loans<\/span><\/h3><p><span style=\"font-weight: 400;\">If a borrower delays their loan repayments, a trustworthy P2P lending site will take steps to recover the debt. Furthermore, it prevents the borrower from entering into further loan defaults and protecting investors&#8217; (lenders&#8217;) money.<\/span><\/p><p><span style=\"font-weight: 400;\">In this regard, peer-to-peer lending platforms and loan originators can offer different approaches to safeguarding investors&#8217; money. One of those is where loans are provided with collateral provided.<\/span><\/p><p><span style=\"font-weight: 400;\">As discussed above, should a borrower default on making payment or default on loan altogether &#8211; the collateral they offered when seeking borrowing is then sold to pay back investors.<\/span><\/p><h2><span style=\"font-weight: 400;\">How risky is P2P lending, then?<\/span><\/h2><p><span style=\"font-weight: 400;\">Simply, no investment vehicle is ever risk-free.<\/span><\/p><p><span style=\"font-weight: 400;\">However, investors can take many different measures and approaches offered by trustworthy platforms to precisely increase the safety of this type of investment.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Thus, the question is, how safe is P2P lending?<\/span><\/p><p><span style=\"font-weight: 400;\">Platforms offer different guarantees and loan diversity to convince investors they will not lose money when investing in peer-to-peer lending.<\/span><\/p><p><span style=\"font-weight: 400;\">These guarantees and lower-risk loans serve as investor protection insurance covering them should a loan default or a payment is missed. Thus they do not lose all their money.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Other ways of mitigating risks in P2P lending come from the investors.\u00a0<\/span><\/p><p><span style=\"font-weight: 400;\">Principally, investors should diversify their investment portfolio and scrutinise peer-to-peer platforms and loan originators before investing.<\/span><\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"<p>As with any investment, there are risks to investor capital. The trick is to manage P2P lending risks so that investments are both lucrative and safe.<\/p>\n","protected":false},"author":3,"featured_media":7036,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"footnotes":""},"categories":[21],"tags":[],"class_list":["post-7034","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-articles"],"acf":[],"blog_post_layout_featured_media_urls":{"thumbnail":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-150x150.png",150,150,true],"full":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png",2240,1260,false]},"categories_names":{"21":{"name":"Articles","link":"https:\/\/moneyhub.ee\/en\/category\/useful\/articles\/"}},"tags_names":[],"comments_number":"0","rttpg_featured_image_url":{"full":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png",2240,1260,false],"landscape":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png",2240,1260,false],"portraits":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2.png",2240,1260,false],"thumbnail":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-150x150.png",150,150,true],"medium":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-300x169.png",300,169,true],"large":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-1024x576.png",800,450,true],"1536x1536":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-1536x864.png",1536,864,true],"2048x2048":["https:\/\/moneyhub.ee\/wp-content\/uploads\/2024\/02\/MoneyHub-Special-Reports-Images-2-2048x1152.png",2048,1152,true]},"rttpg_author":{"display_name":"David Bailey","author_link":"https:\/\/moneyhub.ee\/en\/author\/davidbailey\/"},"rttpg_comment":0,"rttpg_category":"<a href=\"https:\/\/moneyhub.ee\/en\/category\/useful\/articles\/\" rel=\"category tag\">Articles<\/a>","rttpg_excerpt":"As with any investment, there are risks to investor capital. The trick is to manage P2P lending risks so that investments are both lucrative and safe.","_links":{"self":[{"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/posts\/7034","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/comments?post=7034"}],"version-history":[{"count":0,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/posts\/7034\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/media\/7036"}],"wp:attachment":[{"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/media?parent=7034"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/categories?post=7034"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/moneyhub.ee\/en\/wp-json\/wp\/v2\/tags?post=7034"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}