Peer-to-peer lending has emerged as one of the big Fintech trends in the recent years. It aims to get banks out of the lending and borrowing equation. It is, however, not without it’s problems.
The big issue with peer to peer lending is that it relies on consumers to provide the credit. Which is fine when the economy is in recovery, or something akin to it, but what happens when the economy takes a downturn?
Companies like Lendify and FundedByMe offer the lenders a rate the banks would not offer during a hyperinflation. That’s is good and it gives companies and individuals the possibility to borrow cheaper than at banks who may not lends them anything at all. The problem with these companies is that their advertisement make it sound like lending is risk free, which of course, it isn’t.
One clear example is the recent Lendify advertising I saw on Twitter their services, tagged with the Swedish hashtag #sparpodden. This was their tweet:
— Lendify Sweden (@LendifySE) April 13, 2015
It translates into: today’s questions: Pay to have money at the bank or get good return at @LendifySE with #p2ploans?
When I questioned the tweet, as it compares alternatives with vastly different risk, they just laughed it off.
The fact that an apparently serious financial provider would dismiss the risks of lending is sad and does not bode well for the alternative finance companies. There is a, not insubstantial, probability that the company or individual that borrows money from these P2P lenders will default. Especially considering the relative high interest rates charged. If a loan has an interest rate over 10 percent you can be sure that it has that rate for a good reason.
I welcome any reforms or companies that make it easier for SME to borrow but it should not do so while being coy about the risks involved in these types of loans. Consumers are notoriously bad at accounting for risk and these types of schemes market themselves as safe while being exceedingly risky in some cases.
If you want to invest in lending products, invest in baskets of many loans rather than those that are loans to specific individuals and companies as these are riskier propositions.
Did you find this post interesting, illuminating, controversial or silly? Leave a comment below or send me a tweet (@Chronoo).