The risk of a total failure of a P2P platform should not be underestimated, but also not overestimated! Nobody can judge exactly how high this is. On the one hand, P2P loans are still in their infancy (compared to traditional investments such as stocks, funds and the like), and on the other hand, I am not aware of a total default.
What happens in the event of a total failure?
Nobody can say this with 100% certainty due to the lack of precedents. You can find out what such a worst-case scenario looks like with the respective provider in the FAQ directory of the platform or through a specific request from the support. It is usually the case that the P2P platform transmits the so-called “loan book” to a notary at regular intervals. In the event of bankruptcy, the latter is then responsible for processing the outstanding loans. In theory, this sounds plausible to me, but in the worst case I would have to take care of it myself. Realistically speaking, the latter is almost impossible.
How can I protect myself from a total failure?
You cannot protect yourself directly from it, as you have no personal influence on it. However, you can minimize your risk if you observe the following points:
- Diversification as the top priority! Spread your total investment across multiple P2P platforms / providers and loan initiators. One should also think about a diversification into different economic areas (Western Europe / Eastern Europe, various countries).
- Read financial reports! If these are made available, you should read them into them and follow them for years. A possible total loss can be recognized early on in the balance sheets.
- Watch statistics! Every provider makes statistics available to investors somewhere on the homepage. Observe growth rates in credit volume, number of investors and also default rates.
- Establishing the market: The trend is that the longer a provider is established on the market, the less likely it is that there will be a sudden total failure.
My personal assessment
Basically, I think a sudden total failure of a P2P loan platform is relatively unlikely. Rather, I think it is a realistic scenario that some providers will clearly stand out from the competition and others will gradually disappear from their meaning. Here too the old adage applies: “Whoever does not go with the times goes with the times”. In my opinion, there is currently a huge change in the direction of “P2P Loans 2.0”.
The original idea of social lending seems to be falling behind more and more.
Many investors want pre-financed loans, repurchase guarantees / collateral, small minimum investment amounts, no fees etc. – to name just a few points. I don’t exempt myself from it. This is probably the reason why the Eastern European P2P platforms find this enormous popularity. The development of Smava can be seen as an even more extreme example. Smava was one of the pioneers in the German social lending sector in 2007 and sees itself today mainly as a comparison portal for installment loans. P2P loans are now only a minimal “secondary branch”. How the development continues – we will see!.