Peer to Peer Loans
Peer to peer (P2P) platforms allow an investor to loan money to a borrower through an intermediary. In theory the investor receives back his or her principal and interest through the third party P2P sponsor that arranges the loan and collects payments from the borrower. The loans are generally for periods less than five years. This fixed income investment has become much more popular in recent years as investors have sought higher yielding investments; however, investors need to understand that these fixed income investments come with significant risk over traditional loans.
Investors usually do not know borrowers’ identities and forfeit their rights to independently verify the borrower’s credit worthiness. Investors are reliant on the competence, due diligence and trustworthiness of the sponsor. This is important because some P2P sponsors admit that they only verify income for the largest borrowers. Many borrowers use P2P loans to consolidate other debt after banks have refused to loan to them; these borrowers have high credit risks. If the borrower cannot meet his obligations, he can discharge all of his debt including the P2P loan through bankruptcy protections.
P2P loan investors accept the full risk of borrower default. Investors can lose everything if a borrower fails to make good on their obligation. Debt collection happens through and is reliant on the P2P sponsor. Some of these third party sponsors do a poor job of getting investor money back and will charge the investor for all of their collection efforts. The P2P loans are generally unsecured making it more difficult for wronged investors to be made whole.
The social aspect of P2P loans may trick some investors. Even though lenders cannot see the identity of their borrower, the borrower can send potential investors misleading stories explaining why they need the money.
P2P lending is still a new market that is very risky for most investors. The P2P system has only existed for about five years. During this time default rates have skyrocketed over 25% on some platforms. One of the largest platforms paid out $1 million to regulators for not registering its securities. This young market has already seen fraud and scams. Fraudulent P2P platforms advertise fantastic returns with creditworthy borrowers but investors should remember that, if an online deal looks too good to be true, it probably is.
If you have investment losses or problems involving peer to peer loans, call the lawyers at Page Perry for experienced representation at (404) 567-4400 or (877) 673-0047 (toll free).