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Peer-to-peer lending has become very popular for both lenders and borrowers as it has a lot of benefits to both. And now with the blockchain being so prevalent and cryptocurrency very popular, it is getting even bigger as a platform.
Which begs the question: Is it safe?
Of course any type of investing carries risks. And there are always disadvantages to borrowing which people need to be aware of before they take on a loan from any source. Due diligence needs to be done by both the investor and the borrower.
Peer-to-peer lending is under a lot of scrutinies since it doesn’t usually fall under the jurisdiction of any banks or traditional lenders. Without the security of a bank, how do you know if you are safe to lend or borrow?
In this article, we will go over several of the things you need to be aware of before using a peer-to-peer lending platform.
Understand the process
Before you can decide for yourself if P2P lending is right for you, you have to understand the process. Now, there are some differences in platforms and between traditional currency and cryptocurrency, but the concepts are largely universal.
The concept is very basic and acts almost like it has for millennia. A person needs a loan and doesn’t want to use a traditional lender. In which case, they seek people that will lend them money as it was always done. If a friend asks you to lend them money and they pay you back with interest, it is essentially the same thing.
In this case, a website algorithm will help a borrower find a lender and vice versa. In the case of blockchain, it will also help people look for specific types of cryptocurrency to buy and trade like USDT to BTC.
Borrowers like to use a P2P platform to avoid using a bank since many of them have non-traditional banking methods. Not everybody has a bank account and some have less than traditional incomes that would face rejection from a bank. Using P2P is a good way for them to get a loan that would otherwise be unavailable to them.
Lending risks
There are a few risks that are unique to P2P lending. Anytime that you lend some money to somebody that you don’t know there is always a risk that they won’t pay you back.
However, with P2P lending there are some others too. For instance, the platform could close and leave you stranded without any way to get the money back from your borrower. Even if they borrowed in good faith and intended to pay you back, it is caused by the originator of the platform. This is why you have to choose your platform carefully.
Right now there are very few regulators that have control over the P2P lending area so there is always a risk that these platforms don’t live up to their end of the bargain.
*This article has been contributed on behalf of Paxful. However, the information provided herein is not and is not intended to be, investment, financial, or other advice.