`5 Most Common Risks in Peer-to-Peer Lending

Peer-to-peer lending or in its more-trendier name, P2P lending has continued to thrive in recent years, mainly due to the proliferation of the internet. It provides an interesting investment opportunity for lenders while still offering a reprieve for people who end up needing emergency loans every once in a while. There are however some risks involved that affect both the lender and the borrower. Here are some of the 5 most common risks in peer-to-peer lending.

Money demand and supply gaps may extend approval time

Peer-to-peer lending platforms usually act as a middleman between an investor who has funds to lend out and people who are willing to take a quick loan and repay with interest. One emerging problem is that the amount of peer to peer lending sites has ballooned in recent years, with many people wanting to borrow but not as many users having the money to invest in the P2P lending platform. Some websites that list the borrowers and the lenders actually show that there is a wide gap between the money available to be lent and the amount of money people have requested to borrow. It gets discouraging when the borrower needs money is needed urgently but it takes ages before someone finally decides to lend.

Money handling risk investors could easily get scammed

As a P2P lending platform treats the lender as an investor and the borrower as a customer, there is a high risk that the investor may also lose when the P2P lending platform collapses. All the funds that are availed by the investors are usually deposited into accounts owned by the P2P lending platform. In many cases, there is no physical office you can go to make claims if you one day discover that the P2P platform collapses or simply runs off with the investor's cash. Many of the services usually have notes on their website about a third party backer but often you may have a hard time trying to verify the credentials of the third party.

This actually can cause offline lending institutes too so there was a need to control these risks. The most modern and innovative way to decrease a number of deceits is to use automotive lending software systems, for example, Turnkey Lender Peer-to-peer lending platform. It helps to analyze and score credit risk for optimal risk assessment and pricing.

Regulation bottlenecks

Have you noticed that most online lenders will have territorial restrictions for the members who sign up? For example, US online lenders will in most cases lend to beneficiaries who live within the USA. That is because they are backed by banks that are regulated by the US Federal Reserve. They can also verify your true identity through the details such as names, addresses and social security number. This makes it more difficult for someone to put a 'catfish account' and take loans with an inexistent person's credentials. The other reason why there are many territorial restrictions is because someone in a different country can take a loan from a US lender and will not face any legal backlash if he defaults.  

Unlike loans that can be taken through the conventional banking system, a lot of online peer to peer lending services do not have the luxury of attaching your house or car as collateral to the loan. They in that sense take on more risk compared to a brick and mortar bank. The lender ends up having to write off the defaulted loans as a loss and cannot get rid of your collateral to keep their bottom line safe. Most unregulated lenders will, however, opt to lend people with very little restrictions but they will make a kill through very high interest rates. Such loans are also referred to as subprime loans because they do not adhere to any banking laws or standards. In most cases, subprime loans are not insured or guaranteed in any way. Fortunately, the loan market is developing and there are different online lending software on it that solve many problems.

The borrower's risk assessment process is extremely difficult

A good percentage of loans will always end up in default. Most of the time it is because the lender over-rated the borrower's ability to pay up but the borrower can also be too ambitious with their future income. Many times people borrow with the hopes that their salaries can foot the debt and interest that has accumulated. The problem with this view is that you can never be too sure that your job will outlive the loan period. For example, someone can go to a peer to peer lending website and request a few thousand dollars to purchase some furniture or to take a quick holiday with the intention of paying it back in 6 monthly installments. Halfway through the repayment, the person may get laid-off or the company he works in abruptly closes business. In this scenario, the borrower's salary is taken out of the equation even if he had met all the requirements needed to borrow the amount.

Do people who earn the same salary have an exactly equal ability to repay back? One of the tricky things about gauging someone's ability to repay a loan purely on the amount they make in a month is that people have different debt to income ratios. Many people are already burdened with a mortgage repayment, a car loan, student loans and other monthly charges that can make their mammoth salaries seem like peanuts. This is a headache especially on the part of the lender because they may not always have access to information about a borrower's existing loans.

The cosigner's headache

No matter how trustworthy some of your friends may seem, you should always factor in the high possibility that your friend may default. It is less stressful to treat the cosigned loan as your own loan. Everything that could go wrong will go wrong! The person you cosigned a loan for could lose their job or they could find a certain emergency in the family that needs priority attention to what they had already planned to use the borrowed money for. Worse still, you may have come across horror stories whereby people simply take advantage and let you think they have paid off the loan but in reality, they had all along planned to avoid repaying. Your friendship will be constrained if such an event occurs.

The problem with cosigning for a problem borrower is that your credit ratings will suffer too. It gets really painful when you get poor credit ratings for loans that you did not get to enjoy by yourself. With the poor credit ratings, it would be harder for you to get a mortgage or just have access to a quick and low interest loan in future. People with poor credit always end up having to interact with high interest lenders who know that there are potential borrowers who are desperate for money because of a reduced pool of choices.