If you are considering peer-to-peer lending as an option to invest money then the first question that comes to your mind is whether P2P lending is safe or not.
The high returns on investment may attract you first but you may worry about the risks involved in this type of investment. The answer to this question is like most other savings there is always some degree of risk, so it is not possible for your investment to be 100% free.
However, it is possible to manage your money in a way that reduces the risk exposure. It is essential to understand what risks are associated with P2P investment so that you can take steps to mitigate them.
While most Peer to Peer Lending platforms check out creditworthiness of the borrowers and lend to the borrowers who have a good credit history. Still, there exists a risk that some borrowers may default. It can be due to some unforeseen circumstances such as ill health or loss of employment. If a borrower defaults you may lose your money or it can affect the interest you receive. Some platforms have contingency funds to cover you in case of bad debt but this fund is of no use if multiple borrowers default simultaneously.
Platform Goes Bust
One main concern of lenders is what will happen if the platform through which they lend their money goes out of business. In this case you may experience delays in getting your money back or you cannot recover your money at all. Therefore, it is better to find a platform that has a good track record and reputation in the market so that you can avoid any risk of losing your capital.
Money may not lent straight away
Once you made an account on a peer to peer platform and transferred funds to lend. You only start receiving interest or return on investment when your lending offers get matched to the borrowers who want to take a loan on the same terms. It may take some time to find a borrower according to your criteria. There is a risk that you cannot earn interest during this waiting period.
The above are the three major risks involved in P2P lending. There are some ways through which you can mitigate these risks such as careful selection of platforms and borrowers, diversification, and investing according to your risk appetite. Invest in peer-to-peer lending in a reasonable way by understanding risk and reward ratio and earn a steady income.
The P2P lending can be even safer with IFISA (Innovative Finance ISA). However, you must know how it works? Therefore we will provide you brief guidelines on IFISA.
IFISA is a type of Peer-to-Peer lending that operates on peer-to-peer loans instead of cash based ISA. It is also different than stocks and shares ISA. Peer-to-Peer lending makes a connection between the investors who want to lend money with the borrowers, who can be entrepreneurs, companies and property developers. Since you are leaving out the bank from the equation, investment occurs from the online platform that is called peer-to-peer lending portal. That facilitates you in earning higher amounts of interest in comparison to conventional savings accounts.
