5 reasons why p2p lending is bad
It’s a new thing
Peer to peer lending as a concept exists for a bit more than 13 years now and during that time it also managed to survive one financial crisis. But that crisis was at best in peer to peer lending infancy and a lot of investors reported loses during that period. Apparently, people stop repaying loans, once they lose their jobs or when companies go out of business. We are slowly gearing up for a market correction and then a new crisis could emerge. It’s still hard to predict, how p2p lending will hold in those conditions. It might perform significantly better than the stock market, but it might also crash. Technically p2p lending markets should be separate from stock markets. But… If the market is not performing, then ordinary people will feel it too. After all, it’s hard to pay loans when you get fired from your only source of income.
Lending money to people who otherwise could not get a loan
Quite often, people or business that looks into peer to peer lending for loans do not have the best credit score. Otherwise they would look into more traditional lenders. Banks, credit unions or investors. But they chose peer to peer lending, just because it offers them lower rates. Think about it. Lower rates than established lenders. Quite often those who are looking for money would be considered as risky investments for banks.
Business loans are even worse in that regard, most of the time business that is trying to get a loan is already somewhat established and yet it can’t get a loan from a bank. It chooses a different medium, which is not bad in itself but should be noted when considering who to loan your money too.
You are basically third to last resort for them to get money. Other two ways for them are borrowing from family or payday loans. One really not pleasant and another one is basically shooting yourself in the leg for easy money. And let’s not forget, there is a group of people who turn to peer to peer loans, just because they took payday loans in the past and now need to refinance their debt (and that’s a smart move on their end).
But this is not a hard rule. In some markets peer to peer lending seems to be able to offer better interest rates than traditional lenders.
Lack of information about loan taker
This one depends on the p2p platform of your choice. Some, like Finbee.lt, offers quite a lot of information. I can see what debt lendee already has. their income and their household income. His housing status, if he is an owner or is he renting. Education, time in their current workplace and total work time. It’s great, as this allows me to make a better judgment about who I am lending too.
Other companies for one reason or another can only provide less detailed information. For example, Mintos.com can’t give me a full balance sheet of another company that is looking for a loan. Sure they have their own reasons for it. Most likely they can’t do that because it was not them but another external company that found that borrower. Then, yeah… They won’t be able to provide so much information for legal reasons (I guess). But overall they provide way less information than Finbee.
Unclear future results
As I said at the begging of this article, peer to peer lending is quite new. So first of all, one could argue that there is not enough data to predict the future. But this is not about that. With the information that is provided about the borrower, it is unclear if the loan will get repaid. Sure, every platform has some risk evaluation metrics, but even considering them, I still can’t say that A level loan will be repaid. And yes, the stock market is also hard to predict and the real estate market can crash too. But if I invest in S&P500 I probably still have something at the end of the day and would just need to wait it out, to get my money back. With p2p lending, there is a chance that I could over time lose all my investments.
Lack of regulation or protection from the government
And the last reason is lack of regulation. Deposits into p2p platforms are not protected. In the EU, I believe all deposits in banks are insured at least to a certain amount (in Lithuania it’s up to 100k euros). If p2p platforms folds, then there is a chance you can say goodbye to your cash. Most platforms do have plan B though. Quite often some third company will be responsible for managing ongoing commitments, but so far I did not find anything about possible fees that can happen in that case. Surely the managing company won’t take this responsibility out of good faith. And this is one thing I would like to get improved in the p2p loan market. Clearer commitments from all parties in case of peer to peer platform folding.