Top 5 Myths Debunked on the Risks of P2P Lending

P2P lending
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The rise of the current innovative financing era has given way to many interesting developments for investors and borrowers alike. Among the many options, peer-to-peer lending or P2P lending platforms stand out as one of the most prominent, promising, and potentially powerful alternatives to conventional financing sources. 

Essentially, the basic process of P2P lending involves investors lending money to borrowers (usually individuals or businesses pitching opportunities) in the hopes of profitability. 

This allows borrowers to acquire loans quickly so they may stay ahead of the market and ensure business growth or initiate their individual projects in a shorter time span. Most notably, P2P functions without the participation of official financial institutions, leading to a few clear advantages.

What’s more, solutions providers like Ethis are striving to build Muslim-friendly platforms with Shariah-compliance as a priority.

Yet, the many myths and misconceptions that surround the concept of P2P still persist as deterrents for many aspiring wealth builders. Let’s break down some of these popular myths and debunk what so many people think are true about P2P platforms.

Related: Islamic P2P Crowdfunding Explained

1. P2P Lending is unregulated and thus unsafe

P2P lending

Many people think that marketplace lending is like the early days of unrestricted downloads from the torrent. There aren’t any rules or laws in place. But that would be the greatest hoax of all time. This is due to the fact that, in contrast to banks that are subject to the regulatory framework, loans are originated by individuals rather than institutions.

Since 2014, the Financial Conduct Authority (FCA) has regulated the P2P market. P2P has become a well-developed and stable sector in the global financial services industry over the past decade, and is now acknowledged as a viable investment instrument.

The FCA regulates all serious actors in the P2P lending industry to protect the interests of their customers.

Either way, P2P lenders should be regulated, and consumers should be suspicious of platforms claiming third-party regulatory authority.

Even in Southeast Asian countries like Malaysia, there is a widespread belief that P2P lending sites are unregulated and hence untrustworthy when in fact, the Malaysian government has tight control over P2P lending sites. Through regulation and careful implementation, the government encourages platforms that provide innovative digital solutions including P2P platforms, which often benefit both businesses and investors concurrently.

In fact, the Securities Commission Malaysia (SC) has recognised a list of P2P financing platforms, with the laws and regulations of SC being strictly adhered to by each recognised party.

2. Investors can’t control the performance of their portfolios

P2P lending

Another lesser misconception revolves around the thought that investors can’t control their portfolio performance with P2P platforms, since the process is not functionally similar to the independent management of stocks, for instance. 

In most cases however, P2P lending platforms leverage on strong facilitation measures and strive to maintain a good sense of offered control to their patrons as trusted service providers.

As a result, investors often do have full control over the allocation of their funds through the use of technology and tools developed by them.

This also plays into the ability to make critical decisions quickly through these platforms. It is considered a core component to many investment vehicles, and P2P platforms are no different in trying to secure as much profitability while maintaining flexibility for their users.

This means that you can invest freely in line with your aim and risk appetite.

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3. P2P lending platforms comprise high-risk investments

P2P lending

When most people think about P2P, they think about the prospect of high-risk ventures. This is an unfair assumption. Although P2P funding includes some risk, this is no different from any other form of investment. 

Some investors may be concerned about default risks, but with a well-diversified P2P portfolio, you may keep your overall financial exposure to a manageable level. As a result, a P2P financing platform that provides well-diversified investment notes and rigorous risk management allows you to earn bigger returns with a reduced risk.

There’s also this unfounded idea that P2P platforms are a passing risky fad that appeal only to millennials or younger generations when in fact, a good portion of P2P investors are over the age of 55, according to surveys. 

Furthermore, the tiny percentage of millennials would be insufficient to maintain the rapid expansion of the P2P lending business.

In order to minimise risk and maximise rewards for clients, P2P platforms often offer high quality investment notes that range in risk levels. 

4. P2P lending platforms are only for businesses with poor credit scores

P2P lending

If you’ve been denied by banks or have a bad credit score, you may think that P2P lending sites are your only option. However, in practise, even a business with an excellent credit rating may have difficulty obtaining bank financing.

There are a few reasons that can lead to this. For one, it’s possible that a company won’t be able to obtain bank funding because it lacks the necessary collateral or because it is brand new and therefore has no previous credit history.

In contrast, the speed and convenience of the application process found in P2P platforms attracts many companies looking for financing. A P2P lending platform can complete the essential due diligence procedures in as little as two to three weeks, as opposed to months for banks. 

For the sake of their cash flow, businesses depend on being able to secure finance quickly. When compared to banks, peer-to-peer financing is a far more convenient option for those who value convenience over predictability in terms of timeliness and cost.

Related: Equity Crowdfunding (ECF) vs Peer-to-Peer (P2P) Lending

5. It requires a large sum of capital

P2P lending

P2P lending, in contrast to other forms of investment, does not necessitate a substantial capital input to begin. It’s easy for most people to get started in P2P lending with a low-threshold investment, based on their choice of loan, conditions, and degree of risk.

Some of the most popular P2P lending platforms let investors select many of the prerequisites to match suitable investment opportunities, giving investors a high degree of transparency and control over their money.

It’s true that P2P platforms most probably won’t make you a millionaire overnight, and it’s important to be wary of false promises. However, the P2P approach has proven itself to be on par with many of the established investment strategies so far and it holds a lot of promising things for the future of finance. 

P2P lending

The Ethis P2P platform based in Indonesia offers opportunities for funding and investments with high projected profits over short tenures via limited-scope joint-ventures (Musharakah), with active top campaigns from various sectors including energy, procurement, and commodities. One of our latest campaigns – PES 7 – aims to fund the purchase of petrol from Patra Niaga for sale to recurring clients. Join over 30,000 members and accelerate your investing journey to the next level with Ethis.

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Ethis Malaysia: Islamic Equity Crowdfunding
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We operate ethical investment platforms approved by regulators in Indonesia, Malaysia, and Dubai, and also run a charity platform Global Sadaqah serving ordinary people, high-net-worth individuals, corporates and government entities. Best known for crowdfunding impact investments for Indonesian social housing development projects we adhere to the United Nations Global Compact ethical standards and are based on Islamic finance.