Peer to peer or P2P lending is becoming very popular at a very fast growing pace but the safety aspect should not be overlooked. The returns of it that are normally associated with peer to peer lending must be weighed carefully with the risks before you actually indulge in such a venture.
This type of money lending is especially popular among the savers who are sick and tired of the derisory interest rates that the banks and other financial institutions offer. Savers, therefore, rush to these online sites with the intent to secure and earn better interest rates. The returns of this type of money transactions are certainly very attractive which most savers fall for. But it is not easy to say whether they are enough for such a high risk form of money lending. The entire capital of an investor is put to risk which is the primary concern in such forms of money lending.
Avoid the dangerous Times
Peer to peer lending seems to be a very nice form of money lending where one can cut out on the banks and create a really egalitarian financing network.
- This platform also facilitates a proper and strong connection between the lenders and the borrowers.
- The low cost environments one of the most significant features of peer to peer money lending.
However, the dangerous times should not be overlooked especially when the growth of this sector is accelerating significantly. It is taking on more risk as compared to any normal lending environment where higher risks demand higher returns.
Peer to peer lending typically does not operate in a normal scenario of credit. It is the high demand from the desperate investors who are groping for high returns that are driving down the rates further on the offer from all classes of assets. This results in horrible mispricing the risk of such lending.
Getting Back Money Is The Key
Common for all money lending market and type lending money is very easy now. Moreover with the technology money lending is far easier than before. You can simply long on to a reputable site such as libertylending and others and even get instant approval and the money wired to your account within one business day.
However, as easy as it is lending out, it is equally difficult to get it back from the borrowers. In money lending business this happens to be the trickiest part and also the most significant one on which the success and failure of a business depend. Adding on to the woes of getting it back borrowers is the downturn as and when it happens.
According to the reports of peer-to-peer finance association, it is rapidly filling up the gap left by the banks as credit and money lending is cut back by them after the financial crisis. There are a few big names in peer to peer lending and they offer investors to earn a rate of interest anywhere between 5%and 6%c. The funds collected are then lent at higher rates to hundreds of people looking for faster loans.
Features Of It
Peer to peer money lending has got nothing to do with banking and is entirely a different concept. These are not any savings account and are simple peer to peer money lending websites.
These websites usually provide unsecured credits for car loans, personal use, and home improvements. You can also avail it to pay off your credit card debts.
However, the risk involved in such lending is that there is no guarantee that the money lent through such websites will be repaid by the borrowers. These lent funds are not covered by the government regulated Financial Services Compensation Scheme that usually protects all bank savers money up to a certain limit.
The Proven Track Record
No matter what and how grave and clear the risks involved are in peer to peer lending, so far it has proved its mettle and has been providing excellent results. The track record of a few in such business is highly impressive and has also been exceptional in providing exceptional returns to their investors.
- Most of these successful companies have gone through a stiff financial crisis and have found out easy and effective ways to survive and reach their success and thinking of today.
- These companies have learned more effective ways to navigate and deal with the credit crunch and better collection.
- This has ensured safe investments and no losses to the investors’ capital. They have also found out ways in which they can keep the default rate to 2% and sometimes even less than that.
- All these efforts ensure that all the money of the investors is successfully and as desired by them and their investors.
Apart from that the peer to peer websites focuses on safety finds and offer a certain degree of protection from their funds of reserves.
Spreading The Risk
The primary reason for success and the assurance of protection of the money of the investors is the business policy of the peer to peer money lending websites. The fact that the investor’s hard earned money is spread over a large number of borrowers automatically reduces the risks of lending.
This means the money is safe and guaranteed to return because the chances of hundreds of such borrowers failing to return the money are nearly negligible. Even if one borrower faces some sort of financial difficulty, the other 99 borrowers will make up for it.
To Invest Or Not To Invest
When you notice that the financial market is flooded with easy money lent at incredibly low rates of interest you may think to invest in such a rewarding market. However, anticipation is not devoid of apprehension in such markets and it is natural if you have any of it.
Risks are minimized by the working process of these platforms. Experience, crosschecking application data, robust lending process all ensures the safety of your investment. However, make sure your investment sits on a portfolio of cash, equities, and bonds.