Ways To Reduce Risk in P2P Lending

About P2P Lending

P2P lending or peer-to-peer lending is a direct form of lending money to individuals, organization or people without any financial institution. P2P provides both secured and non-secured loans but generally, it provides more unsecured loans that’s why it generates a higher risk with investing in P2P loans.

Risk while investing in P2P Loans

Before any bigger investment, it is normal for the user to worried about whether an investment will be safe or not. P2P is generally done to use a small amount of capital from many individuals to finance a new business, which connects borrowers without the involvement of financial institutions.

Let’s understand the risks associated with P2P Lending

No Government protection

P2P loans are not protected by Government authority or do not provide any form of protection. This involves a higher risk for the users investing in P2P loans.

Credit risk

When it comes to investing in P2P, there is always a higher risk if the buyer won’t repay their loan as borrowers have low credit ratings which make them defaulters. That’s why a lender should always be aware of the default probability of his counterparty.

P2P Platform

Choosing the right platform is very necessary. Peer-to-peer lending risk become higher when you invest in an unsecured platform. There is always the risk that the platform could go bankrupt. Need to choose a platform that is transparent for the investors and should have communication with the users is necessary and the company should be genuine and to be trusted.

Loan Originator risk

Loan Originators are the companies that provide information to the borrowers, and manage them about collecting interest payments. Due to their mismanagement or having a high amount of credit default, there is always a risk of loan originator go bankrupt.

Concentration risk

Concentration risk is also termed as not enough diversification in P2P lending. It is a risk associated with an investment when an individual or group of exposures move together in an unfavourable direction. Recovery is unlikely in this significant loss.

Final Thoughts

According to the report, P2P mostly provide unsecured loans and because of this it generates higher risk; about 95% of investors got unsecured P2P loans through which their accounts get bankrupt. The research uses should take care of all the risks while investing in any type of loan.