Investing in Peer to Peer Lending involves risks, including the risk borrowers will not repay their loans and the risk of Peer-to-Peer Lending Platforms discontinuing the servicing of the loans. The Notes are highly risky and speculative as you do not know the borrower members and are investing based on limited information that may be unverified or inaccurate. Investing should be considered only by persons who can afford the loss of their entire investment.
Every investor should consider the risks of an investment before investing their money. The following are some, but not all risks associated with Peer to Peer Lending. It should not be considered an exhaustive list.
- Default Risk. The loans are 3-5 year unsecured installment loans. An investor has little recourse if the borrower decides not to pay. Unlike home loans, where the house is usually put up as collateral, or car loans, where the car title is typically held for collateral, there is no assets put up for collateral on Peer-to-Peer Loans. They are more similar to unsecured bank installment loans or unsecured credit card loans, all which carry higher default risk than secured loans. Information supplied by borrower members may be inaccurate or intentionally false and should generally not be relied upon. Performance data is limited in history and may not reflect the true risk of loans. Default rates on may increase as a result of economic conditions beyond the control of borrowers. Borrowers are not restricted from incurring additional unsecured or secured debt, nor do they impose any financial restrictions on borrower during the term of the loan, which may increase the likelihood that a borrower may default on their loan. Borrowers may seek the protection of debtor relief under federal bankruptcy or state insolvency laws, which may result in the nonpayment of the Notes. The death of a borrower may substantially impair your ability to recoup the full purchase price of Notes. The borrowers may not have been able to obtain a conventional loan. In the event that the servicer receives payment from a borrower/member after the final maturity date of the securitized note, the servicer will retain such payment. Collection expenses will significantly reduce the entire amount available to the investor.
- Platform bankruptcy – These loans are through the servicer and the issuer not the issuer and the borrower. If a peer-to-peer lending platform, such as Lending Club or Prosper, file for bankruptcy, there would be disruption of collecting payments of principal and interest, and investors could lose some principal and interest as a result. If it were to become subject to a bankruptcy or similar proceeding, the rights of the holders of the Notes could be uncertain, and payments on the Notes may be limited and suspended or stopped.
- Interest rate risk – Prevailing interest rates may change during the term of the Loan. If this occurs, you may receive less value from your purchase of the Note in comparison to other investment opportunities. Additionally, borrower members may prepay their Member Loans due to changes in interest rates, and you may not be able to redeploy the amounts you receive from prepayments in a way that offers you the return you expected to receive from the Notes. Additionally, Federal law entitles borrowers who enter active military service to an interest rate cap and certain other rights that may inhibit the ability to collect on loans and reduce the amount of interest paid on the corresponding Notes.
- Poor loan diversification – LendingClub and Prosper both address diversification on their websites. Both clearly state that diversification is a key component to a successful Online Lending investment strategy. Poor diversification could cause negative returns for a portfolio.
- Liquidity risk – The loans are 3-5 year unsecured installment loans. While a small amount of principal and interest is paid back each month, the remainder is held by the borrower, and the only way to get all the principal back before the end of the term of the loan is to sell the note on a secondary market. However, one could lose principal in the process of selling on the secondary market, or the secondary market could close, leaving investments illiquid.