Peer To Peer Lending: You Take All The Risk

 

A number of peer to peer money lending services have been springing up, some with serious backing, others with strong partnerships, all promising a fairer, friction-free way of lending and borrowing money.

 

The theory sounds good - remove the banks from the equation and provide better interest rates for lenders and borrowers.

 

In practice the banks perform important services to both lender and borrower. Those services include vetting potential buyers for credit history and capability to pay; and insulating savers from the risk of bad lending. Admittedly the GFC proved that the banks can get caught out too, but that was a matter of greed and poor oversight, but usually that sort of thing happens behind closed doors and losses get averaged out over the banks portfolio.

 

With peer to peer lending the company providing the match-making service takes none of the risk and provides little protection for either party. It is in the service's interests to make as many loans happen, whether that is good for the lender or borrower is immaterial. Misrepresenting the risk involved seems like a short step to take to profit in an industry which doesn't exactly have a good name for honesty.

 

A cautionary tale from an acquaintance of mine, who was impressed by the idea of making more of his savings than the low interest rates that his bank was offering. He invested $1,000 into a peer to peer service, spread across four borrowers. Two of those defaulted leaving him out half of his capital.

 

People with good credit histories borrow from their banks at lower interest rates than peer to peer services. Which should tell you that those people seeking out a loan from such a service is perhaps not the sort of person that you would trust with your hard earned cash.

 

Peer to peer lending is something that you will probably hear more and more of in the future, especially as more established finance industry players seek to ride the coat tails of Fintech to profit.

 

As a lender you should be very wary of what such a service means for your money.