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Is peer to peer lending safe

Is it safe to invest in p2p lending? This is always a concern for investors looking to invest in this space.

Over the past few years, peer-to-peer lending has become increasingly popular. This can be attributed to the fact that most people and organizations are tired of the high-interest rates charged by banks, and the bottleneck procedure one has to go through to get a loan. 

Just like other investment options, p2p lending is not 100% safe. There are some risks that one gets exposed to when they invest. However, compared to other investments such as options, bank loans, futures, and high-value bonds, it is fair to term peer-to-peer lending as a relatively safer investment option.

Some of the common risks that cut across all p2p lending sites include:

  • Platform risks. It is possible for the platform you invest with to suffer bankruptcy, which can force them out of business. In such cases, if there are no safety measures put in place, i.e., a contingency fund, investors may suffer losses. However, this is not a major issue, as most sites offer contingency funds, and they separate their operating funds from those of their users.
  • Another common risk with the peer-to-peer lending sites is the technology risks. Peer-to-peer lending takes place online, and this makes it susceptible to hacking attempts. Without a reliable security system, a platform will get hacked, and your personal and crucial information may be exposed, which can result in cases of personality theft.  

Other risks include;

  • Market risks
  • Money drag
  • Fraud
  • Credit risk

What makes peer-to-peer lending safe?

Peer-to-peer lending is characterized by some features that improve investor’s safety on the different platforms. It is therefore, important to point out that peer-to-peer lending can be as safe as the platform that you choose to invest with. Different platforms have different features that protect their users from risks. These features include:

  • Diversified products

Most p2p sites offer a large pool of loans that investors can invest in. This way, you can invest in different loan types, which reduces the chances of suffering a total loss when a possible risk occurs.

  • Self-chosen investments

Investment on the peer-to-peer lending sites is made on a voluntary and independent manner. There is no party to coerce you into investing in particular loans. You have the right to choose a specific borrower, originator, and the type of loan to fund. This allows you to invest in those loans that are low-risk rated hence making it a safe investment option.

  • Regulated platforms

It is important to note that all p2p lending sites are regulated by relevant authorities and laws in their countries of operation. These regulations offer protection to consumers.

  • Early exits

Though not a feature in all the p2p lending sites, investors can prematurely exit an investment when they want to. This is available to those sites that have secondary markets. Early exits make it easy to create liquidity in a platform. It also gives investors the chance to get out of an investment that they realize will not end well, considering its performance.

  • Investor protection policies

One of the greatest fears in investors is having no insurance over their investments. If you invested in property today and the investment goes south, there is no way you will be able to get back the money invested. But with peer-to-peer lending, some sites have put in place measures to ensure that the investor is adequately protected in case of any risk. The protection comes from the buyback guarantee on loans, and actions such as investment protection funds found in some platforms.

  • Peer-to-peer lending has better returns

A safe investment option for an investor is one that can assure them of high returns within a specific period. Investments on p2p sites have high-interest rates, with some going up to 20% per annum, and there is an assurance that the interest will be paid after an agreed period. Compared to other investments like bank savings, where the interest is usually low with the best rates ranging between 4-6%.

  • The low minimum investment to start

Most peer-to-peer lending sites allow investors to begin with an initial amount of as low as $10. As a result, the investor is not forced to expose a huge amount to the investing risks at once. After you have learned the ropes, you can gradually increase the amount invested.

  • Transparency

Transparency is one of the guiding principles of peer-to-peer lending. Important details for any listed loan are made available to anyone that might be interested in investing. Additionally, once you invest, you will get constant updates on how the investment is performing, which promotes total transparency.

Should you invest in peer-to-peer lending?

Yes, you should.

Some of the benefits that you will enjoy from p2p lending cannot be obtained from any other investment option. The crazy interest rates are unmatched, and you won’t be charged to invest, it doesn’t require you to spend much time managing your investment, and also reduced taxation all make p2p investment a good option for you.

It is evident that the benefits you will get from peer-to-peer lending far outweigh the demerits of this investment. Even banks that have secure loans cannot offer the benefits that p2p sites give to investors. For most people that save their money, they are driven by the promised interest rates. But finding a bank that can offer good interest rates to match p2p lending sites is almost impossible.

Considering how popular peer-to-peer lending has become, it won’t take long before the banks realize that they are losing out big time to these platforms. In the end, they will be forced to adopt a similar loaning system like the one in p2p sites, but we will have to wait to see.

Final take

There are indeed risks associated with p2p lending, just like with other investments. However, by carefully selecting your investment platform, you will help mitigate the risks. Additionally, the features discussed above will also help to lower the risk of losing your money while investing in peer-to-peer lending.

From a general perspective, peer-to-peer lending is one of the best modern investment trends that you can reap from. The investment is entirely passive, and you can manage it remotely from your computer. You are assured of high returns and the safety of your money instead of leaving it underutilized in your bank account.

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