If you are actively looking for investment opportunities that are risk-free, you need to understand that there is no such thing as risk-free investments, however great it might sound. The fact that investing is not 100% safe should not discourage you from looking into different investment possibilities as long as you are fully aware of how the investment works in detail and what the specific risks are.
P2P Lending, serve exclusively as a marketplace to bring together the demand for money from borrowers with the money supply from investors. There is a certain risk when investing in P2P loans and knowing to reduce them is crucial so as to invest safely.
The default risk
The primary risk that the investor is worried about is the default risk i.e where a borrower denies paying EMIs. As with all investments, this risk can be reduced well with good diversification.
Inaccurate evaluation of creditworthiness
The next risk is that the credit ratings are estimated wrongly at times. It is quite possible that credit ratings are misjudged or that borrowers can simply lie. In this case, the credit risk is underestimated and the actual default on loans is higher than the expected default derived from experience. But to reduce this risk, it is essential to carefully read and clarify credit projects, especially at the beginning. Furthermore, it is of advantage to spread your investment over borrowers.
The collapse of the P2P marketplace
This is the risk of a P2P platform going bankrupt. Most platforms have security mechanisms that protect the investor with ESCROW Payment Mechanism which provides utmost transparency using trusteeship mechanism to transfer money. The Escrow account functions as a detached unit from the platform to ensure complete security of investors and borrower’s money. The complete end to end process is intuitively managed by the platform without human intervention. An annual and monthly audit of the Escrow account is conducted by the escrow agent in adherence to the prescribed mandate.
And therefore, P2P lending is a very intriguing and captivating investment alternative that the Fintech industry has brought to light. It offers private investors a completely new asset class and borrowers an interesting and less bureaucratic alternative to traditional bank loans. As is always the case with investing, high opportunities also entail risks, which must be known and minimized.