This type of investment has been in vogue for a few years now.
More and more media and blogs explain its benefits: high profitability (above the stock market), many platforms to choose from, possibility of investing from a mobile app… However, is everything as nice as it seems?
At the risk of sounding like a spoilsport, in this article I have compiled the 8 most important cons of investing in peer to peer lending. I think it is interesting that you should know them before investing for the first time.
Few historical data
When we invest in a mutual fund, we usually analyse its performance over the past few years (sometimes decades) to assess whether or not its return is significant. The same is true if you are looking to invest in an ETF that replicates an index such as the S&P 500 or MSCI Word. The past performance of these investments helps us to decide whether or not we are interested.
However, crowdlending, being a fairly recent type of investment, does not offer much historical data to analyse in order to assess whether or not it is a good investment. In the absence of statistics, all that remains is faith.
Risk of non-payment, the main of the dangers of crowdlending
It is a risk intrinsic to any loan, of whatever type, and the most important of all. It refers to the risk that the borrower will stop paying the money to the lender, i.e. that payments will start to be delayed until the situation ends in a default.
Some crowdlending platforms, such as October or Mintos, use what is known as a “repurchase guarantee”, which is nothing more than a commitment to repurchase the loan in the event that there is a delay in payments. In this way, the security in the event of a default will be much greater for the small investor: if the lender does not pay, their crowdlending platform will take over the debt.
However, the risk does not disappear one hundred percent as several defaults could lead to the bankruptcy of the platform itself. In that case, who would pay the investor?
The lack of liquidity is another of the great dangers of most crowdlending platforms. When you invest, you should know that your money is no longer available until the loan is repaid.
Therefore, you should only invest the money if you are completely sure that you will not need it until the loan maturity date. There are very few platforms that allow you to get your money back early, so don’t take any chances.
Most of the platforms are foreign
This is not a drawback in itself, but we believe it is one more factor to consider. The main platforms, or at least the most popular ones, are foreign because in Spain the regulation is more restrictive than in other countries. This limits the competitiveness of our crowdlending companies against foreign ones.
Tax deferral is not possible
Tax deferral consists of delaying the payment of taxes and is very interesting for increasing the long-term profitability of investments.
If you buy stock shares, for example, every time you sell one you will have to pay a percentage of income tax for the profit you make.
However, if you invest in an investment fund, you can transfer your money from one fund to another without a tax charge. You will only be accountable to the tax authorities when you actually recover your money. In the meantime, you avoid paying taxes.
It is therefore said that shares are not tax-deferred, while investment funds are. Unfortunately, investing in crowdlending doesn’t offer this tax advantage either, so you won’t be able to defer paying taxes on the profit you make.
To sum up: P2P lending? Maybe yes, but with caution!
As you can see, crowdlending is not as beautiful as it is painted. Now that you know its risks, does it still seem as interesting as you thought it would be?
Please note that this article is not intended to discourage investment in crowdlending. In fact, we find it an interesting investment with high returns in the short term.
However, it is my obligation to open the eyes of the small investor so that they are aware that it is a fairly new investment model and with some risks that they will have to evaluate.