HIDDEN HAZARDS OF INVESTING IN PAIR-TO-PAIR LOAN
This type of investment has been in vogue for a few years now.
More and more media and blogs are explaining its advantages: high profitability (higher than the stock market), many platforms to choose from, possibility of investing from a mobile application … However, everything is as beautiful as it is. it seems?
At the risk of sounding like a spoiler, in this article I have compiled the 8 most important the inconvenients of invest in peer-to-peer loans. I think it is interesting that you know them before you invest for the first time.
Little historical data
When we invest in a mutual fund, we usually analyze its performance over the past several years (sometimes decades) to assess whether its performance is significant or not. The same is true if you are looking to invest in an ETF that tracks an index such as the S&P 500 or the MSCI Word. The past performance of these investments helps us decide whether or not we are interested.
However, crowdlending, being a fairly new type of investment, does not offer a lot of historical data to analyze in order to assess whether or not it is a good investment. In the absence of statistics, only faith remains.
The risk of non-payment, the main danger of crowdlending
This is an intrinsic risk in any loan, whatever the 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. payments start to be delayed until the situation ends in default.
Some crowdlending platforms, like October or Mintos, use what is called a “buyback guarantee”, which is nothing more than a commitment to buy back the loan in the event of late payment. This way, the security in the event of 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 flaws could lead to the bankruptcy of the platform itself. In this case, who would pay the investor?
Another of the great dangers of most crowdlending platforms is the lack of liquidity. When investing, you should know that your money is no longer available until the loan is paid off.
Therefore, you should only invest the money if you are absolutely sure that you do not need it before the loan maturity date. There are very few platforms that allow you to get your money back sooner, so don’t take any chances.
Most platforms are foreign
This is not a disadvantage in itself, but we think it is one more factor to consider. The main platforms, or at least the most popular, are foreign because in Spain the regulations are more restrictive than in other countries. This limits the competitiveness of our crowdlending companies compared to foreign companies.
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 stocks, for example, every time you sell one, you will have to pay a percentage of income tax on the profits you make.
However, if you invest in an investment fund, you can transfer your money from one fund to another tax-free. You will only be accountable to the tax authorities when you actually get your money back. In the meantime, you avoid paying taxes.
We therefore say that shares are not taxable, unlike investment funds. Unfortunately, investing in crowdlending doesn’t offer this tax benefit either, so you won’t be able to defer paying taxes on the profits you make.
In short: the P2P loan? 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 sound as good as you thought it was?
Please note that this article is not intended to discourage investments in crowdlending. In fact, we find it to be an attractive investment with high returns in the short term.
However, it is my duty to open the eyes of the small investor so that he is aware that this is a fairly new investment model and with certain risks that he will have to assess.