Peer to peer lending platforms have been working since 2014 and helping individuals and businesses fulfil their emergency financial needs. Different types of p2p loans are offered by these platforms that can be secured or unsecured. Unsecured loans are issued based on borrower’s affordability and creditworthiness, and no asset is used as collateral. This type of lending has more risks because if a borrower defaults, the lender has no collateral to fall back on and get his money back. On the other hand, in secured p2p lending, the loan is secured against the UK residential or commercial properties. These loans are also known as p2p bridging loans. These loans are less risky, and if a borrower defaults, the lender will be able to get his money back by selling the property.
Unsecured peer to peer lending is popular and dominated in the UK because in starting p2p platforms only provide unsecured personal loans. However, now the trend has changed, and many p2p platforms started offering secured p2p loans.
Risks Associated with Secured P2p Lending
Undoubtedly, your investment is secured against the borrower’s property; still, there are some risks in this type of lending. You must take into account these risks before investing in p2p secured loans. Following are the risks with secured p2p lending:
- Borrower default
- The platform goes out of business
- Mortgage fraud
- Interest rate risk
- Property market risk
Let’s look closer at each risk and see how platforms took measures to make lending safe.
It is the most significant risk in p2p property lending when a borrower fails to repay the loan amount. It means you may lose your capital or investment. This risk causes loss of money when you have no collateral. But p2p platforms that provide loans against a property reduced this risk to a great extent. Because in this case, if a borrower defaults, the lender has a right to sell the property to get his money back. Well-reputed lending platforms check the market value of properties and issue loans against good quality properties that can be easily sold.
Platform Goes Out of Business
It sometimes happens that the platform through which you invest in bridging loans goes out of business, also known as platform insolvency. To avoid this type of risk, you must research and choose a trusted peer to peer lending platform. However, p2p platforms also take a number of steps to provide full protection to the lenders in case of unlikely events of insolvency. For example, highly reputed platforms keep all the lenders’ money that is not lent out in a separate account. Moreover, the security provided by the borrowers against the loan is also held by an independent security agent.
This type of risk occurs when a mortgage is taken fraudulently. This fraud involves organized criminal gangs, individuals, and at least one corrupt associate such as a solicitor, accountant, or surveyor. Mortgage fraud can include:
- Overstating income, property overvaluing.
- Taking mortgages from different lenders on one address.
- Taking out mortgages in the name of individuals who are deceased after identity theft.
P2p lending platforms mitigate these risks by borrower identity checks, undertaking credit checks and meeting in person with the borrowers and their solicitors.
Interest Rate Risk
It is a risk that arises from the fluctuation in interest rates. The general interest rate could rise above the rate you are earning from your loans. However, platforms try to mitigate this risk by providing loans for only a short amount of time, three months to a year.
Property Market Risk
Most bridging loans are repaid when the sale of the borrower’s property is completed. So the loan interest rate and repayment can be affected if there is a downturn in the UK’s property market. But if you lend through trusted p2p platforms, they protect you against such risk through maximum LTV cap, minimum rental income coverage and many other measures.
Now that you know about secure peer to peer lending and the risks associated with this type of lending. You can select a p2p platform to invest in bridging loans that follow best lending practices and take significant measures to protect lenders investment. Always remember to choose a regulated platform and authorized by the Financial Conduct Authority (FCA).