Peer-to-peer (P2P) lending is something I’ve been writing about for quite a while now. I maintain that it’s a fantastic new way to bypass the banks and less-than-desirable investment vehicles in favor of a platform over which you have complete control.
Quite a few people are concerned with the medium, however, and there are some valid reasons for the worry. It’s relatively new, and moreover, it’s not the most well-known of investment tools. In the interest of full disclosure, let’s break down a few of the security risks you may face when diving into the world of P2P lending.
Concern #1: Platform Shutdown
What if one of the big dogs in the biz like Prosper or LendingClub suddenly shut down? Would you suddenly find yourself scrambling to collect on hundreds of outstanding loans in your portfolio? It’s certainly a scary scenario, and those who’ve invested thousands would likely shudder at the thought.
Fortunately, the platforms have addressed this fear, and they have safeguards in place to serve as contingency plans should the bottom unexpectedly fall out at some point in the future. For example, LendingClub has a special arrangement with a massive, very well-known debt collection firm called Portfolio Financial Servicing Co. The company will kick in to call in outstanding loans should LendingClub somehow dissolve. It’s not failsafe, but it should help you sleep at night knowing there’s a backup plan in place.
Concern #2: Lack of Government Backing
Savings accounts are FDIC-insured. This means if a bank goes down, there’s insurance on your money., Meaning? You’re guaranteed to get it back as long as the government is solid. P2P loans are not like depositing money in a bank, however. This is because P2P lenders (investors) can choose the level of risk they’d like to assume based on the interest rate of low- to high-risk borrowers on their platform of choice.
For this reason, the US government treats peer-to-peer lending as a legal investment. This means that Uncle Sam does not back the repayment if one of your borrowers defaults on a loan you funded. No FDIC means you’re essentially using the platform without a safety net.
Concern #3: Online Privacy
This is a valid concern for any online financial activity, but even more so when you’re using an online lending platform. Everything is in the platform’s database – there are no physical bank locations you can drive to if something is amiss with your account.
That’s why you should remain vigilant and use all the best practices you would for safeguarding any online financial account. Use a complex password and change it often. Keep your antivirus software and OS updates current. Run frequent virus scans. Don’t share any of your personal financial information with anyone.
There are risks to P2P investing, but in my opinion, they’re not much worse than the risks you face with many other investment vehicles out there today. In fact, at this point, I’m more wary of the stock market than P2P lending. What do you think?