The Risks of Peer-to-Peer Lending

Peer-to-peer lending has become one of the most popular ways to lend and borrow in the industry. For those with extra money, it presents a way to make a higher interest than normal. For those that need money, it presents another option, other than using a bank. You can borrow money from individuals who have the money, which is an easier process than going through the lending process with any bank. While it can be a nice option to use, it is not without risk. 

Less Professional

One thing that you have to watch out for with peer-to-peer lending is unprofessional lenders. When you deal with a bank, there are policies that outline the entire process. The bank will oversee everything. It is nice to know exactly what to expect from your lender. They will usually not do anything unexpected along the way and will be consistent throughout. However, with a peer-to-peer loan, you never know what to expect. You might be dealing with someone who has never lent money before. Just make sure that everything is laid out in writing before you borrow any money because you don’t want to run into someone that will call you on a daily basis, make threats or increase your debt.

Risk of Default

If you are a lender, you are doing business with people that you don't know. These people may or may not be good credit risks. With peer-to-peer sites, you have to make your own lending decisions. Banks have entire teams of people that are there to help in making lending decisions. If you make the decision based on limited information, you could make the wrong decision. If your borrower defaults on the loan it could devastate you. This might have represented a large amount of money for you. If a bank had the same loan, they would just write it off and move on. However, for you it is a much bigger hit. If you are considering peer-to-peer lending, you need to make sure you do your homework before you invest your money.

Stability

The peer-to-peer lending industry has not been around that long. Compared to other forms of lending, it is still a relatively new industry. Therefore, if you choose a peer-to-peer site to work with, how do you know they will even be around a few years from now? Many sites take care of all of the payment processing for you and take the money directly out of the borrower’s accounts. They transfer the money onto you per your agreement with them.

You need to consider the following questions:

  • What would happen if they went out of business?
  • How would you get your money back in that case?

With peer-to-peer lending, you are putting an awful lot of faith in a company that may or may not be around in a few years. Getting your investment back depends on the integrity and the staying power of the peer-to-peer company. For some people, this can represent a risk that is completely out of their control.


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