Is Peer-to-Peer lending safe? What you need to know

Is P2P Lending Safe?

As with any investment, it’s crucial to know the risks involved in Peer-to-Peer (P2P) lending before you put up your hard-earned cash. Equally important is how platforms evaluate, manage, and present those risks. We take a look at two of the main categories of risk when it comes to P2P lending platforms and the different measures that are taken to mitigate them.

Peer-to-peer lending is a relatively new phenomenon in the world of finance, but it’s no passing fad. Both investors and borrowers stand to gain, in the form of higher returns for the former and easier access to credit for the latter, when the more staid, traditional forms of financing are removed from the equation. 

But things that look good are not always what they seem. You may be reading this because you’ve been enticed by guarantees, safety nets, and other marketing gimmicks that make it seem like some P2P lending opportunities are a no-brainer, proverbial golden geese ready to lay. In reality, there is always risk involved in investment, and not all opportunities, or platforms, deal with it in the same way. 

With a wealth of experience in the development and financial world on staff, EstateGuru is well aware of this. That awareness informs our risk assessment and reduction methods, and thus far they’ve proven very effective. To an almost frustrating extent in fact, in that our track record is so good that some people fear it’s too good to be true. As I advised above, that can often prove the case, so in the name of transparency, and with a view to winning over some of our doubters, we’re going to take a look at two of the main categories of risk in P2P lending, and how we like to address them.

How safe is peer-to-peer lending for investors?

It’s a nightmare scenario for any investor. You log into your account only to find it no longer exists. Forget about returns, what happens to your investments? Can they be recovered, and does anyone care? This site can’t be reached.

It’s always important to read the terms and conditions attached to any platform and see if there are red flags such as the company’s ability to change them without prior notice or consent. The old switcheroo is an old and still worked scam. Also, keep a beady eye out for a clause that states the investor’s funds are not the property of the platform, and be wary if you don’t find it. A lack of appropriate regulations or transparency allows for the possibility of fraudulent or otherwise unseemly behavior. Comprehensive financial reporting should be conducted on a regular basis.  

Find out what the protocol is in the event that the platform goes bankrupt and research the owner and upper management to ensure they have a history of doing the right thing. Historical involvement in any form of financial mismanagement is a warning sign that your money might not be in safe hands. You should always prioritize the safety of your investments over potential returns. If a platform makes claims that seem too good to be true, they probably are. 

EstateGuru is a facilitator of real estate investments and does not manage user assets. Investment contracts are signed between the borrower and the investor, EstateGuru simply facilitates this transaction. Should EstateGuru suffer bankruptcy,  a contractual entity will be appointed to take over the role of EstateGuru to serve all of the investments. Even in this worst-case scenario, our users can still access their funds.

EstateGuru is managed by some of the most experienced real estate developers in Estonia. Our founder, Marek Pärtel, has been involved in the real estate industry since 2002, overseeing development and investment projects across Europe. He is also the co-founder of Invego, a leading residential property development group. Our management team includes some of the most experienced and well-regarded people in finance, appraisal, and property from around the world, operating in five countries. Your money is in safe hands with us.

Is peer-to-peer lending safe for borrowers?

The most obvious risk with P2P lending is one inherent to every loan, that the debtor will fail to make interest payments timeously, or repay the loan at all. As has always been the case, determining who or what constitutes a reliable investment is not always easy. It also holds true that the more eye-catching the potential returns, the more likely you’ll never actually see them. Platforms evaluate risk by assessing potential borrowers’ according to criteria of their own devising.

Though abstract, value-free financial entities like meme coins and non-fungible tokens in the form of a burnt Banksy or a custom sneaker are all the rage, investing in projects that offer collateral beyond the immensity of their ideas has very obvious benefits. Collateral in the form of property is especially reassuring because though businesses and bitcoins can lose value after a rogue tweet by a space-bound billionaire or a perma-tanned president, real estate tends to retain its value. Even the Donald would surely agree with that.

At EstateGuru, the vast majority of our projects are secured with a first rank mortgage. Potential borrowers are pre-vetted and meet strict criteria. Financial health is gauged and a comprehensive track record compiled, including evidence of past successes and a business plan if available. As we are real-estate-backed lenders, we also assess the real estate collateral in terms of location, market value, the valuation report methodology, and what it had previously sold for.

We employ traditional banking credit procedures, supported and expedited by modern technology. We also consult third-party sources and maintain contact with construction supervisors. Our dedicated staff conducts on-site inspections on a regular basis until a project is complete. All of this allows for faster, more comprehensive evaluation. EstateGuru doesn’t convene the board once a week to ponder our next investment, we are financing projects 24/7 on our platform. 

Our stringent evaluation criteria ensure it seldom happens, but EstateGuru has a fast and efficient recovery process in the event that a borrower moves into default status. First, we take every possible effort to reach an amicable solution. Should there be an abject failure to cooperate on the part of the borrower, we terminate the contract and move to have the collateral quickly auctioned, with a view to refunding our investors as soon as possible.

Another truism in life, and investment, is that putting all of your eggs in one basket is seldom a good idea. EstateGuru allows investors to diversify across loan types (development, bridge, and business loans) and markets (we operate in Estonia, Latvia, Lithuania, Spain, Finland, Portugal, and Germany, with plans to expand). Investing in different loan types, with different securities, minimizes concentration risk, while diversifying geographically reduces microeconomic factors relating to market or political risks. Even given these measures, we would strongly recommend you diversify outside of the EstateGuru platform and P2P lending more generally. It should be a part of your portfolio, but not the whole thing. Spread those eggs around.

EstateGuru applies a low Loan to Value (LTV) ratio as an additional safeguard against market deviations. Our average historical LTV is below 60%,  which means that the value of a property would need to decrease by over 40% for our investors to take a hit. By applying a low LTV ratio, choosing our markets carefully, and drawing on the expertise of dedicated, specialist staff, we feel we can keep our users’ money safe, and maintain our average return of just over 11%.

It’s important to stress again that no investment is a guarantee. Thinking that anything is certain is naive, and we would encourage you to always do your due diligence and ask hard questions before you invest your money. Never invest more than you can stand to lose, and be safe out there. We’re here if you have any questions for us. 

 All investments, including real estate, are speculative in nature and involve a substantial risk of loss. We encourage our investors to invest carefully. We also encourage investors to get personal advice from a professional investment advisor and to make independent investigations before acting on information that we publish.