Peer-to-Peer Lending: Friend or Foe?
If you have some spare money, it may seem tempting to invest in peer-to-peer platforms. P2P lending is a type of crowdfunding that connects borrowers and lenders without the involvement of a financial institution. They’re more predictable than stocks or cryptocurrencies and seemingly require less financial knowledge. Plus, they offer decent returns. So, what’s the catch?
For one, the market still lacks regulation, creating the potential for unfair business practices. The collapse of P2P companies such as Kuetzal, Monethera, Grupeer, and Envestio makes that very clear. These platforms all offered buy-back guarantees and high yields. In the end, they all had failed business models or were outright scams. Several featured made-up projects on their platforms that an observant investor might have noticed. But they knew that the average investor lacked the know-how (and even the interest) to perform due diligence. In the end, they ran off with lots of money and left their dumbfounded investors empty-handed.
What are some of the warning signs you should look out for? A promise of unrealistically high returns is one. There’s no such thing as low risk – high return. The higher the return, the bigger the gamble. It’s always worthwhile to look past advertising catchphrases and dig deeper into the company behind the platform.
Before registering, you should make sure you’re able to find information about the platform’s owners. Make sure key management staff are not connected to money laundering scandals and that the company offers full disclosure of loan originators and borrowers. It’s also important to make sure that the buyback guarantee is not provided by a 3rd party and that the company uses a bank account from the same country that it’s registered in. The owners should be willing to share a template of the loan agreement before you sign up.
Though it might seem tempting to rely on well-written, fact-based reviews performed by 3rd parties, you should take those with a pinch of salt. Many P2P bloggers get a small sum for everyone they sign on, so they make money even if you end up losing everything. If that sounds a bit like a Ponzi scheme, that’s because it sort of, kind of, maybe, is.
If a P2P platform does seem legit and you decide to invest, be sure to check the fine print. Many of these companies lock up your money for many years, and if you want to withdraw early then you’ll lose lots of cash. Oh, and check the service fees, as those will diminish your profit. Overall, P2P platforms are risky and have some less-than-appealing terms, so maybe it’s best to just steer clear of them.