What is peer to peer lending? Is it safe?

peer to peer lending
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Peer to peer lending

Peer to peer lending has become the go-to option for investors. However, as more and more people are become attracted toward this platform, the investors are also becoming aware of the potential risks that are involved in peer to peer lending. If you are wondering whether p2p lending is safe and a good investment, then the short answer would be, ‘Yes’. Nonetheless, it would be beneficial for you to know all the potential risks. You cannot just lend your hard-earned money without understanding everything.

Peer To Peer Lending Potential Risks

The risks with p2p lending can be associated to different areas of the process. First, let’s understand the platform.

  1. Platform risk

The platform risk is the trustworthiness of a peer to peer lending firm. In this technological age, start a lending platform online can be an easy process. Hence, there is the risk of somebody exploiting such convenience through negligence.

‘You have to ensure that you invest your funds through a firm that has a proven track record.’

For instance, you can see online case studies or reviews that can provide you an insight into how the firm operates. Or you can also join discussion groups where you can ask for some advice. Further, you can also check out other investor’s reviews on online sites like Trustpilot and forums. This can help you get an idea of a platform’s trustworthiness.

  1. Credit risk 

Credit risk is always present when you lend money to someone. This is the risk of a borrower defaulting on loan repayments which means the investor doesn’t get the money back.

In case a borrower default on loan repayments then you can lose a part or all of your funds. But don’t worry, there is a way to reduce this risk.

You can reduce this risk by diversifying your investment in multiple projects. All you have to do is lend a small amount of funds to a large number of borrowers. Another way to reduce risk is by lending through a platform that offers a buyback guarantee or some other form of protection.

  1. Lack of protection 

Lack of protection scheme might be a big risk associated with peer to peer lending. It is like living without medical insurance, and you can’t get the treatment in unexpected emergencies. If you put your savings in the bank and that bank goes under, your money remains protected under the Financial Services Compensation Scheme (FSCS). On the contrary, with peer to peer lending this, there is no such guarantee. 

While a lot of peer to peer lending firms have put in place some type of protection such as buyback guarantee in case of default loan, but there are still firms that do not have any adequate protection in place for investors.

‘Invest in Platforms that offer protection for your investment.’

The protection is an extra layer of security where the firm has to repay your money back within a time frame. Also, you should look for firms that have a defined plan which is used to collect payments from borrowers even if the firm goes out of business.

  1. Platform volume 

When you evaluate a platform, you have to ensure that they have enough demand and supply for funds. If you invest in a platform that has a low level of borrowers, then your money could be idle for a long period of time.

  1. Technological Risk

Majority of peer to peer lending firms pay special attention to reducing and eliminating the cybersecurity risk. Still, you need to check the basic technology that a platform uses. Let’s discuss how you can do that:

Check if the platform’s site has a lock beside it in the browser:

The lock beside a website address means that the site has an SSL protection and it encrypts the link between a browser and web server. In simple words, it means the website is secure and trusted.

  • Check if the site uses reCAPTCHA or Google Two factor authentication 

These work as an additional layer of protection. So, don’t forget to check if these are in place or not.

Regulation of P2P lending platforms

Peer to peer lending platforms have become a major player in the UK financial market. These platforms can pose a risk for the economy and the market if not appropriately regulated. The regulations for peer to peer platforms are less compared to the strict regulations of a bank. But, now every country that offers these services have created and implemented rules which control p2p lending platforms activities. These regulations increase the protection level for investors, hence making the peer to peer lending a safer option.

P2P Regulation in the UK

The regulatory authority in the UK that is responsible for peer to peer lending platforms is the Financial Conduct Authority or FCA. This authority is responsible for assessing each peer to peer firm and approve whether they can conduct their activities or not. One goal of the FCA is to improve the regulatory framework and create defined actions that will be taken if a platform faces failure.

Countries that offer peer to peer services are moving in the right direction by protecting your funds and by creating regulations of peer to peer lending procedures and activities. Remember, every investment comes with a risk. But with peer to peer investment opportunities, there are ways to control risks and get most out of your finances.