Hi All, I'm Interested In Understanding The Potential Risks Associated With Peer-to-peer Lending. Does Anyone Have Insights Or Personal Experiences They Could Share On This Topic?

This topic has 3 replies, 4 voices, and was last updated 9 months, 1 week ago by Isabella Fortuna.

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March 18, 2024 at 12:06 pm #2494

Zaheer Abbas
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Hi all, I’m interested in understanding the potential risks associated with peer-to-peer lending. Does anyone have insights or personal experiences they could share on this topic?

March 18, 2024 at 12:07 pm #2495

Victor Epand
Participant

Borrower defaults can range from 0.1 to 2% industry-wide.

How this affects returns and the possibility of principal loss:
If, for example, you’re earning a 15% return and face a 2% default rate, your net interest drops to 13%. As for losing principal, it’s not an issue since your earnings still include that 13% interest.

Concerns about the platform shutting down:
Transactions are safeguarded through an Escrow account, a globally recognized model, managed by a bank trustee. This means the agreement between borrower and investor remains intact regardless of the platform’s status. In India, underperforming platforms might merge with or be acquired by larger entities, as seen with the Satyam case by MM.

Observations on missing out due to hesitation:
Interest rates in P2P lending have seen a decline; from 18% in 2017, they’ve dropped to 12% in 2020, and are predicted to reach 8% by 2023. It’s advisable to be strategic and embrace some risk. Incorporating P2P investments as 20% of a portfolio can contribute to its robustness.

The importance of platform selection:
Choosing the right platform is crucial. After thorough research, I’ve identified some reputable options. For more information, refer to Bhanu Prakash Reddy Chaganti’s insights on the safety of P2P investments in India and recommended platforms.

Invest smartly for favorable returns, and don’t miss this second chance to benefit from the journey of interest rates.

March 18, 2024 at 12:08 pm #2496

Rohan Sailesh
Participant

I’ve been engaged with a prominent P2P lending platform for roughly five years but have spent the last year gradually withdrawing my investments as the loans are repaid.

Here’s why:

The platform offered borrower data intended to aid lenders like me in reducing risk, including credit scores, employment duration, default history, credit line usage, housing status, and more. However, there was little to no correlation between these supposed risk indicators and the actual likelihood of default. For instance, a borrower categorized as high-risk, who never made a payment, was initially predicted to yield a return of 11.24% despite a projected 27.99% if the loan had been paid off. This borrower had a clean financial history, low debt-to-income ratio, and stable employment, yet defaulted immediately.

Even borrowers with seemingly more secure profiles, such as higher income, professional occupations, or military service, experienced defaults, sometimes declaring bankruptcy within the first few months.

The discrepancy between the risk assessment provided by the platform and the reality made it clear that the information was not reliable.

Moreover, the platform’s calculation of returns was complex and eventually revealed to be overly optimistic. What was once claimed to be a 12% annual return was corrected to 5.5%, showcasing a dependency on the platform for accurate financial processing and calculation.

When loans defaulted and went into collections, the platform’s ability to recover funds was opaque, especially if the borrower declared bankruptcy. Furthermore, a deal made by the platform granting preferential access to lending opportunities to large investors significantly reduced the selection for smaller lenders like myself, from over 75 opportunities to just a few, raising concerns about fairness and transparency.

Ultimately, my experience highlighted significant issues with the platform, including its transparency, accuracy of provided investor information, return on investment calculations, and preferential treatment of certain investors.

March 18, 2024 at 12:10 pm #2497

Isabella Fortuna
Participant

Peer-to-peer (P2P) lending is an innovative financing method that has gained popularity recently. It connects borrowers directly with individual or institutional lenders, circumventing conventional banking channels.

There are inherent risks associated with this type of lending, making it crucial to grasp the fundamentals before participating. Here are some key points to consider:

For borrowers, P2P lending offers an alternative source of financing, particularly for those who may not be eligible for traditional bank loans. While the interest rates might be higher compared to bank loans, they generally remain lower than those associated with credit cards.
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