AMA Christopher Tan
Asked on 26 Jan 2019
Recently the instrument of P2P financing (Moola sense, Funding Society) are getting popular and hot? i see many businesses and retail investors are benefited but also many have also exploit the system to default intentionally? What risk level P2P financing belongs to and is it a bubble? The platform companies are still making money regardless the borrowers default the payment or not.
Hi! I hope that I can shed some light in this space because I had interned at one of such firms before.
To be clear, the risk associated here with P2P financing is the default risk, where the firm you have lent your money to has defaulted and can't pay you back. There are many ways that the risk can be managed but my time at the p2p firm has taught me that it's really important to find a trustworthy p2p firm and understand what p2p product is being offered.
P2P firms need to perform due dilligence on the borrowers that come on to their platform. When due dilligence is strong and investors trust the team, many investors are a lot more confident about their investments. In fact, the only way you would know about what p2p investment products are on offer and what companies you are lending to is through the p2p firm. Hence, most of the information about who you are lending through is filtered through the p2p firm before reaching you.
There are a variety of P2P investment products on offer as well. This ranges from term loans to factoring. The risk and returns for each investment product is very different and it would pay to understand each one of them.
P2P businesses will selectively choose business to fund via crowdfunding, typically those with solid business plan to prevent high default rates. You can take a look at the rates from the various companies' website. For example, Funding Societies have a default rate of 0.91%. You may also wish to look at the returns (interest), puntuality of their payments and reviews by other users before considering which platform to use.