Peer to Peer (P2P) is a crowdfunding model between individuals that is gaining ground in France. This alternative loan solution is touted for its better returns, flexibility and the opportunity it offers investors to generate passive income. But what about the risks it presents for its actors?
We show you some risks and drawbacks to be prepared for when you choose to invest in peer-to-peer.
The first performance risk is above all the default of debtors due to their inability to repay the loans taken out.
Remember that most individuals who use P2P are people or companies disqualified from conventional loans because of their borrower profile considered too risky by credit organizations. You could therefore experience repayment defaults.
The second performance risk is the failure of fundraising, due to insufficient participation of lenders or the mismatch of loans with borrowers’ criteria. Your money should normally be returned to you at the end of the subscription period but may remain blocked in the borrower’s account.
Another risk you may face is early repayment of loans. This fact directly affects the return on your investment. In fact, it may happen that the borrowers manage to repay the loans taken out before the initially scheduled maturity.
The downside for you is the loss of returns you might have accrued during the amortization period of the loan.
Balance risk on management
This risk is generally due to lenders who struggle to rationalize their investments. It is common for P2P investors to want to multiply their returns to a higher level through manual investments. Or take the risk of exposing their capital by granting large loans on a single project.
As with all other types of investment, diversification is a rule that remains valid when you invest in equity loans. It is generally advisable to spread your loans over different projects, rather than putting all your capital on the same horse. Favor medium or long term returns with small, more secure loans.
Risk with the platform directly
Two major drawbacks can affect the P2P platform through which you invest: fraud and insolvency. Indeed, the bankruptcy of the platform will result in the loss of your capital.
Likewise, fraud is a risk to be foreseen with the recent proliferation of P2P platforms. In order to limit its scope, the legislation requires that client funds be kept in an account separate from that of the platforms and out of their control.
Insolvency risk of credit company partners
P2P loans go through partner credit companies which may also find themselves in bankruptcy. The risk generated by the insolvency for the investor is variously mitigated depending on the P2P platforms.
Some platforms grant lenders either a non-repayment guarantee, a percentage of the amount invested, or no guarantee at all. This is the aspect that should hold your attention when choosing your platform in order to limit your risks.