Is Peer-to-Peer Lending Safe?

[lantran]

If borrowers fail to repay their loans, you can lose your cash

[hoahero]

I also believe that thinking big and trying to gather more funds is a good idea because the risk of spending the little you borrow and not growing is out there.

[Solitare]

Some good introductory thoughts on Peer to Peer lending in this NASDAQ article.

As regards to the safety of p2p investments, there is one crucial thing you need to understand (taking into account that you already know about such concepts as diversification).

The most important thing is understanding what is the underlying asset. Meaning, to who the particular p2p platform is lending. And this is extremely crucial. Just to give you an example. Consider p2p platforms that issue payday loans (i.e. Twino or other p2p consumer lending platforms). In essence, if you go through this platform, you lend money to people who are unserved by banks and in most of the cases incapable of managing their finances. Currently the default rates are low and this is fine and they have even a buyback guarantee (meaning that if your loan defaults, you get the principal back). But imagine what happens in case of financial distress. There would up to 70% of loans defaulting and no payback guarantee would ever work in practice. So as long as economy is doing well, p2p concept can be considered relatively safe. But be careful what is the asset.

[Markallen]

The development of the peer-to-peer industry is a good thing for both investors and borrowers.
The greatest issue is that the industry in its current form and size has not been tested through the worst of a recession.
It is only then that investors will discover how easy it is to access funds, how much the safeguards cover and what the maximum potential loss could be.
The product also needs to be compared against similar alternatives. These are not bank savings accounts and should not be compared against the rates on offer there.
This is an investment product and should be compared against corporate bonds that offer between 4pc and 5pc, and shares that currently offer between 3pc and 6pc.
The nightmare scenario would be a pensioner drawing down their funds and placing a large portion into one of these products believing it to be as safe as a bank.
Any peer-to-peer investing should sit in a portfolio which includes cash, bonds and equities.
A sensible starting point would be to not invest more than 5pc of any savings pot. After the ravages of a recession, perhaps that can be increased.

[Cavender]

Following are the benefits of Investing in P2P Lending Platforms

Higher returns – P2P lending offers higher returns to investors on average. Depending on the risk you choose to take, the returns could be either high or moderate. Most investors choose a combination of high risk and low risk investments.
Diversification – It offers investors a chance to diversify their overall portfolio as investing in consumer credit is a completely different asset class than any other investment.
Simple to understand – For individual investors, P2P lending is far easier to understand than most other investments such as bonds or stock trading.
Opportunity to do good – A lot of investors are drawn to this form of lending as it gives them a chance to help others, small businesses or struggling families, who may not get help from traditional financial institutions. Some people also like the fact that real people and not a faceless institution is being helped.

[idlenight]

Be aware that the first couple of months you're going to see REALLY high returns, but it'll quickly go down as some of your first loans become overdue. My rate of return is about half of what it was the first few months. (Note that I invest in some low-grade loans)