Market crash exposes the risks in P2P lending sites

In the past, low interest rates have driven many savers to try peer-to-peer (P2P) investing in order to boost their returns. With interest rates of anywhere from 3% to 15% a year, P2P looked attractive. But now the increased risk that went with that supercharged return is coming to the fore. To get the big returns, you had to lend your money to people or small firms looking for loans.

The risk was always that your borrower wouldn’t be able to repay the loan, leaving you out of pocket. If a lender defaults you could at best see a dent in your returns, but at worst lose some of the capital you invested. Now the downturn could wreak serious damage on P2P investors’ savings. Many borrowers won’t be able to repay their loans.

While some platforms have tried to protect investors by tightening lending criteria and increasing interest rates for borrowers, many people want to take their money out of P2P and put it somewhere safer. But you may not be able to withdraw your cash. The Times reports that “investors have been desperately trying to reclaim money stuck in peer-to-peer platforms as companies either freeze withdrawals or impose heavier exit penalties”.

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There are two ways to get your money out of P2P. You either wait for your loans to be repaid – which can take years – or sell your loans to other investors on the so-called secondary market. But several P2P firms, including big players Funding Circle and Zopa, have tried to curb their secondary markets after the number of customers trying to withdraw cash rocketed. Funding Circle has closed its secondary market, while Zopa has introduced a 3.56% market-adjustment fee that has to be paid on top of the 1% exit fee if you want to sell your loans.