P2P Lending carries a high risk of default as most of the loan given is unsecured loans. It is important to understand these risks before we invest in these products.
P2P Lending the defaults are usually higher in case the lending is unsecured in nature. In some cases the lending is done to various merchants and for short duration which makes is less risky.
All P2P lending companies usually publish the default and return and the investor can look at these to assess the risk. Some high level data at the time of writing this article:
|P2P Lending Companies
|upto approx 8-9.5%
|Lendbox (Per Annum)
How is liquidity provided?
P2P Lending in its raw form is not liquid. If someone has taken a loan for 2 years, then then money is blocked for investors for 2 years.
Many evolved P2P Lending program are now providing options to invest in P2P products based a fixed tenure to investors. After that tenure, the investment is passed to other investors and hence investors get a fixed tenured option to invest and withdraw money after that tenure similar to Bank Fixed deposits.
How is risk managed?
P2P Lending risks is managed by dividing your investment in many investments of many small chunks and then each borrowers taking the loan from a large number of investors. This way the default losses are distributed to a large number of investors. It is more like all investors pooling money and collectively. If the platform is in net gain, then all investors make money in mostly equal promotion.
P2P lending is high risk and high return investment option and investors who understand the risk well, can consider it for investing a small amount.
Also see: Review video