Investors Warned to Weigh the Risks of Peer-to-Peer Loans Before Investing
NASAA Warns Investors to Weigh the Risks of Peer-to-Peer Loans Before Investing
The National American Securities Administrators Association Inc. issued
an investor alert this month that advises individual investors to fully
weigh the risks of Peer-to-Peer loans before they invest in the products.
Peer-to-Peer lending (also known as "P2P lending") is spreading rapidly over the Internet. Through P2P lending, small businesses and individuals are "matched" over the Internet via a "platform" (a peer-to-peer lending website) with investors who fund loans for them. With the credit crunch of the past few years, many small businesses and individuals have found it difficult to obtain unsecured loans through traditional banks and credit unions. P2P lending is meant to connect those who have money to lend with those who need it. Typically, the borrower can obtain a loan anywhere from $1,000 to $25,000, and the lender is promised a capital return.
P2P loans may offer a solid benefit to both the investor/lender and the borrower. However, it is important that investors fully understand the terms of the loan and the nature of the investment. In its alert, the NASAA warns investors: "It is difficult to generalize the risks [of a P2P loan], since each transaction structure differs significantly from platform to platform."
According to the NASAA, investors should keep the following points in mind prior to investing in a P2P loan:
1. Peer-to-peer loans are unsecured, which means that the investor must rely on the borrower's promise to repay the loan. If the borrower fails to repay the loan, collection efforts may be extremely difficult.
2. Information about the borrower may be limited. Often, the name of the borrower is not released to the investor/lender. Additionally, the platform will provide limited financial data on the borrower, if any, and the data is unlikely to have been verified by the platform company.
3. The likelihood of default may be unusually high, and could even exceed 25% on some platforms.
The NASAA advises investors to always verify for themselves all the information they are given about a particular financial product, particularly if that information was obtained over the Internet. Additionally, the Association recommends investors contact their state securities regulators to conduct a background check before they decide to invest with any person or in any product. "One simple phone call to your state securities regulator could help you spot the red flags of fraud and avoid losing your money on a scam," warns the NASAA.