Understanding P2P Lending Risks
Every investment carries risk, and P2P lending is no exception. Understanding these risks is the first step to managing them effectively.
Types of Risk
1. Credit/Default Risk
What it is: Borrowers fail to repay their loans.
Impact: You lose part or all of the principal invested in that loan.
Mitigation:
- Diversify across 200+ loans minimum
- Prefer platforms with buyback guarantees
- Avoid concentrating in high-risk loan grades
- Monitor default rates across platforms
2. Platform Risk
What it is: The P2P platform itself faces financial difficulties or goes bankrupt.
Impact: You may lose access to funds or face lengthy recovery processes.
Mitigation:
- Check if the platform is regulated
- Diversify across 3-5 platforms
- Research the platform's financial backing
- Avoid putting >25% of your P2P portfolio on any single platform
3. Liquidity Risk
What it is: Inability to withdraw your money when needed.
Impact: Funds locked for months or years during emergencies.
Mitigation:
- Keep 6 months expenses in accessible savings
- Choose platforms with active secondary markets
- Invest in shorter-term loans for part of your portfolio
- Don't invest money you might need soon
4. Currency Risk
What it is: Exchange rate fluctuations when investing in non-base currencies.
Impact: Returns can be enhanced or eroded by currency movements.
Mitigation:
- Track investments in your base currency
- Consider hedging costs vs. potential gains
- Be aware of conversion fees
The Diversification Strategy
Platform Diversification
| Portfolio Size | Recommended Platforms |
|---|
| < €5,000 | 2-3 platforms |
| €5,000-20,000 | 3-5 platforms |
| > €20,000 | 5+ platforms |
Loan Diversification
- Minimum: 100 loans
- Recommended: 200-500 loans
- Maximum per loan: 0.5-1% of portfolio
Geographic Diversification
- Spread loans across different countries
- Avoid over-concentration in any single economy
- Consider economic conditions in borrower countries
Buyback Guarantees: Are They Safe?
Many platforms offer "buyback guarantees" that promise to repurchase defaulted loans. However:
Pros:
- Protects against individual loan defaults
- Simplifies the investment process
- Often comes at no extra cost
Cons:
- Only as good as the platform's financial health
- May not cover all scenarios
- Creates false sense of security
Best Practice: Don't rely solely on buyback guarantees. Diversify and treat them as an extra layer of protection, not a guarantee.
Setting Risk Limits
Personal Risk Assessment
Ask yourself:
- How much can I afford to lose entirely?
- When might I need this money?
- How would a 20-30% loss affect me?
Recommended Allocation
- Conservative: Max 10% of savings in P2P
- Moderate: Max 20% of savings in P2P
- Aggressive: Max 30% of savings in P2P
Track your diversification and risk exposure with our diversification analyzer.