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What are the Risks of Peer to Peer Lending?

May 10, 2011 By Peter Renton 32 Comments

Views: 1,730

I was chatting with a friend of mine over the weekend who has just inherited a small amount from her grandfather’s estate. She knew about my involvement in peer to peer lending and asked me if it was a good place for this money. Of course, I told her it was a great idea.

Then she asked me what the risks were and I rattled off a few of the points I mentioned below. But after our conversation I realized that I had never done a post detailing the risks of p2p lending and it is most likely one of the first questions potential investors will ask. So here it is.

The prospectuses of both Prosper and Lending Club go into great detail (over 20 pages each) about the potential risks of p2p lending. While I encourage everyone to read these prospectuses I realize that few people will take the time. So, here are the five main risks as I see them:

1. Borrower Defaults

When you invest in borrower loans these are unsecured loans, meaning there are no assets backing the loans (such as a house in a mortgage loan). So, if a borrower defaults on the loan there is little an investor can do. You just take the loss of whatever amount of principal is left unpaid. With p2p lending default rates averaging around 3% a year, most investors will encounter defaults at some point. [Read more…]

Filed Under: Investing/Lending Tagged With: diversification, interest rate, Lending Club, mistakes, Prosper, sec

Views: 1,730

My Biggest Mistake in Peer to Peer Lending

December 3, 2010 By Peter Renton 15 Comments

Views: 92

For Big Mistakes...photo © 2009 Shun T | more info (via: Wylio)I first started out with peer to peer lending back in 2009. I looked at both Prosper and Lending Club but with Prosper in a quiet period then, Lending Club was the only real option available. So I transferred in $500 and started looking at loans.

An hour later after looking at dozens of loans I made my decision. I would invest $250 each in two B rated loans. Big mistake. Even though both these borrowers seemed like a good risk, a few months later one of these loans defaulted and boom, my net return plummeted. By that time I had already put in quite a bit more money and was spreading out my risk more, but even still I found myself in the bottom 10% of Lending Club investors at that time. [Read more…]

Filed Under: Investing/Lending Tagged With: diversification, Lending Club, mistakes, Prosper

Views: 92

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ABOUT LENDIT FINTECH NEWS

LendIt Fintech News, Powered by Lend Academy, has been bringing you all the news and information about fintech and online lending since 2010 when it was founded by Peter Renton. We not only have the industry’s most active news site, but also the largest investor forum and the first and most popular podcast.

We are a team of fintech enthusiasts who have been covering the industry for many years. With a deep knowledge of online lending, digital banking, blockchain, artificial intelligence and more our team covers the daily news and writes in-depth editorials.

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