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Getting Started with Peer-to-Peer Lending
Getting Started Guide
What are the risks of investing in peer to peer lending?
What are the risks of investing in peer to peer lending?
Zach Richheimer avatar
Written by Zach Richheimer
Updated over a week ago

Like with any investment opportunity, there are risks involved, and p2p is no different. It’s important to understand the risks before getting started. While there are many possible risks of investing in p2p, the list below aims to be as comprehensive as possible.

1. Credit or Default Risk

As p2p loans are typically unsecured consumer loans, the inevitable truth is that some borrowers will not repay their loans. This is a normal occurrence and should be expected if you invest in p2p. However, there is also risk that the underwriting quality of loans available for investment deteriorates materially, or extreme economic conditions result in significantly higher default rates which heavily impacts an overall portfolio return.

2. Interest Rate Risk

With a debt investment like p2p, there is typically a fixed interest rate attached to each loan for its duration. As such, if you invest in loans now, interest rates may rise significantly over the loan period - causing the underlying value of the notes in your investment portfolio to generate less than the market interest rate.

3. Business Risk of the Marketplace

Despite having almost a decade of operating history, most established marketplaces are narrowly profitable and still relatively new businesses. Therefore, although we believe this to be unlikely, a marketplace may be subject to bankruptcy proceedings. The marketplaces we work with at NSR Invest have arrangements in place with backup providers that stand ready to continue servicing of loans and payments in the event of bankruptcy. Additionally, while some marketplaces, such as Prosper have bankruptcy-remote structures to help prevent such risks for lenders, it is unclear what would actually transpire in the event of bankruptcy.

Likely occurrences are that payments and uninvested cash may be subject to delayed availability for extended periods. And, although unlikely, the borrower-dependent payment notes investors hold may become worth materially less or nothing at all.

Although most p2p marketplaces rely on a partner banking institution to issue loans, there are concerns that marketplaces are not as heavily regulated in comparison. New regulations may be enacted that make p2p lending for marketplaces unsustainable or unprofitable. Other types of regulatory changes could result in the requirement for lower interest rates on new loans, existing loans, or, in an extreme case, the nullification of loan repayment.

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