How safe is Peer to Peer lending ?
.jpeg)
The growth of peer-to-peer lending – individuals lending directly to other individuals, cutting out the large financial institution in the middle – is increasingly attracting interest for investors belonging to all sections of society. According to an article in the Financial Times, the amount of money lent on peer-to-peer platforms rose from virtually nothing in 2007 to around £380 million in 2013 and from there to £823 Million in 2016. However, despite the success of this relatively new form of investing, many potential lenders are still skeptical about the risks involved.
Peer-to-peer lending platforms typically offer returns of up to 16 percent on an average and may go up to 30% in some cases which is significantly higher than the returns currently being offered by savings accounts and other traditional asset classes. It cannot be denied that a risk of loss is inherent to any type of investment, good peer-to-peer lending platforms introduce several levels of protection that are designed to significantly reduce the associated risks.
Risks of lending is reduced in three main ways:
a. meticulous underwriting to ensure all approved borrowers are creditworthy and can demonstrate that their loan is affordable,
B. Helping to determine interest rate and risk levels through the platform's unique credit score model
c. physical verification of intended borrower's declarations and documents
Another level of protection against default which is being worked upon is a reserve fund and insurance against borrower default risk, fraud and cybercrime. The main risk involved in peer-to-peer lending is a borrower defaulting. In order to ensure borrowers can be trusted to repay their loans, a stringent process of underwriting is carried out for every application. This includes a full credit check, an affordability assessment and a thorough identity check.
According to P2PMoney in UK, the average losses sustained by lenders on peer-to-peer platforms are around 1.5 percent of the total sum invested. In short, the level of protection against fraud and borrower default usually offered is around five times the industry average.
At a time when savers are desperate for safe, inflation beating returns, the possible returns provided by peer-to-peer platforms are growing increasingly attractive. Some level of risk is inevitable with any type of investment opportunity, but the market-leading protection afforded by the p2p lending platforms goes a long way towards making peer-to-peer lending one of the safest ways to invest for inflation beating returns.
Note: Edited version 2018
Source: http://bit.ly/2sMP6FC