The biggest risk for investors in crowdlending is the loss of capital in the event the borrower fails to pay back the loan. By virtue of their economic position, small businesses and startups are highly vulnerable to the financial downturn and get affected the most during the period of recession. Any default in payment by their clients will directly affect their ability to repay the borrowed capital.
Generally, there are six crowdlending risks ranging from slight risk to extreme risk. They include:
Money drag is the least serious risk of crowdlending. When you lend your money through a P2P platform, the terms usually range from days, months, and even years. Once the loan has been paid off, you will most likely have to reinvest it plus the interest you have earned. Some platforms have an auto-invest function that allows you to automatically reinvest your money back. If the platform doesn’t have the types of loans that match your loan criteria, your money will just sit on your account without generating a return.
This risk is quite straight forward. It occurs when the borrower fails to repay the loan back. This can happen when you have received part of the money and the interest or nothing at all. You may platforms that include legal procedures to help you recover your money.
You may find crowdlending platforms that offer loans from different originators while others only offer loans that they have selected themselves. If you use a platform that does not allow the use of third-party loan originator, you are likely to experience loan originator bankruptcy.
The above two risks are considered serious. But platform bankruptcy is what is called a very serious risk. Platform bankruptcy has hit the Asian crowdlending market severely from 2017 to early 2019. You don't have to be worried about the above two risks, but you have all the reasons to spend sleepless nights because of platform bankruptcy.
Geopolitical and –economic risk is where the finical markets crush big time or when a substantial number of borrowers default their loans simultaneously because people have been laid off as it happened in 2008.
This is a rather non-financial risk and you will most likely not lose your capital over it. This risk stems from the fact that some of the P2P platforms are not transparent enough about how your money will be spent.