Investors can never be too sure when they step onto the platforms of peer to peer lending. As much as they have to deal with unpredictable borrowers and their unsecured loans, lenders also need to consider that the platforms they’re working on aren’t perfect as well. Something could always go wrong with the system, and as a wise investor, you should be aware of them.
As the old saying goes, knowing your enemy is half the battle. Just like any other investment, you need to be prepared to experience setbacks and at least know how to mitigate them. Here are some of the more common risks inherent to the peer to peer lending system.
Platforms CAN go Bankrupt
Now, nobody really knows what it’s going to look like. It’s still very early and thankfully, no peer to peer lending company has yet to declare bankruptcy. But like most traditional financing companies, it’s wise to determine whether the website you’re working with has all possibilities in mind along with a reliable backup servicer in case the unexpected happens. Companies that have a reserve specifically protected from litigation and claims are more likely to rehabilitate itself compared to its less equipped competitors.
But because it hasn’t ever happened, the least that you could do as the investor is to pick the peer to peer lending platform that will make you feel safest.
Rising Interest Rates
Whether it’s through government stimulus or some result of changes in the market, be prepared that interest rates on loans as well as on traditional banks may rise. But for someone who will be profiting on loans based on interest rates, this seems like a good thing, doesn’t it? But it actually has more harmful effects.
First, should the rise in interest be across all financial institutions, this would put investors at a disadvantage because borrowers will lose the very motivation for resorting to peer to peer lending in the first place.
On the other hand, an increase of interest within the platform alone could reach a point where borrowers would be deterred from making loans in the first place. While this isn’t something that one can singlehandedly deal with, it’s important to be aware of the possibility, no matter how unlikely.
It’s safe to say that one of the main reasons why people get into peer to peer lending is that it’s outside the reach of regulation, something that’s imposed on traditional banking intuitions. But as the trend grows and P2P lending becomes a more popular alternative investment solution, the governments will take interest in making sure that the public who engage in it are protected.
Of course, this isn’t something that will hamper your ability to profit from peer to peer lending. But with the right approach you can prepare for these changes when they do happen. So there’s really no reason to be afraid of the risks of peer to peer lending. But there is a NEED to prepare for them.
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