With investors always looking for a better return on their investment it's inevitable that peer-to-peer lending will appear on their radar. Now, whilst there is no reason why these sites could not be considered as part of an investment portfolio, I do feel that a few words of caution would not go amiss.
Anyone who read my site will know I'm not a fan of social lending sites. So to balance the deluge of pro-social lending coverage out there, here are 7 reasons not to lend through peer-to-peer lending sites -
- All loans are unsecured so any lender must be aware that defaults do occur and that they could lose some or all of their money
- As these sites are fairly new there is no robust data on default rates or how many loans are in arrears
- At present, these sites are not regulated and therefore there are no common industry standards or established complaints procedure should something go wrong
- As a lender once a loan is agreed you are tied to the term of the loan or incur a charge if withdrawing early
- Lenders do not receive the actual interest rate advertised as the site will take a cut of around 1%
- Tax is paid on any interest earned, less lending site fees, but losses due to bad debts cannot be offset against tax liability
- Advertised interest rates do not take into account the effect of bad debts which could bring this rate down to below that earned in a high street savings account
If you want more information read my earlier post on social lending sites for more information.