3 Huge P2P Lending Mistakes You’re Making Now

We talk to 4thWay users a lot directly, and we get your emails and survey results from you.

What we find is that lenders are making the same mistakes over and over again – and frankly it's worrying us.

While the P2P lending sites really need to take some of the blame for not making certain facts clear enough, lenders like you and me need to take responsibility. It is easily in lenders' power to avoid these mistakes.

So here I have pooled together the three big P2P lending mistakes that seemingly everyone is making. The third one is especially worrying, so let's build up the suspense:

P2P lending mistake 1: you don't get “easy access”

You know how half of food packets say “Might contain traces of nuts”? Well, I am allergic to some nuts and I eat from those packets all the time. Maybe I'm dicing with death or at least a swollen mouth. But the warning doesn't seem to mean anything most of the time.

The same cannot at all be said for the phrase: “Early access is not guaranteed”, which you find on lots of peer-to-peer lending sites.

If you really expect that you're going to want or need most of your money back in a hurry, you need to take that expression seriously at all times.

As 4thWay's specialists say, the natural length of a P2P investment is usually the length of the loan. And while you can fight the wind on a breezy day, you will be blown backwards when a storm comes. You can't fight nature when it is at its most powerful! At best, during these times, you'll be allowed to exit early only if you're prepared to sell your loans to someone else for a loss.

A “storm” doesn't even have to be an economic slump. It could just be, for example, that there are currently a lot more borrowers than lenders at one P2P lending provider, and so there aren't enough people around to take your existing loan parts off you.

That's why delays in getting money back have already hit many 4thWay users, who have complained that they weren't fully aware that it could be difficult to sell their loans rapidly before the borrower has fully repaid them. It could easily happen to you.

You just have to make sure that you don't tie up too much money in P2P lending when you think you might need lots of it back very quickly.

2. Bad debts can take a long while to recover

At the risk of sounding like Donald Trump: “many people say” that they weren't aware that they would wait quite a while to get their money back when loans go bad.

Only, unlike Donald Trump, I'm telling the truth. Many people really have told us this.

There are some kinds of lending, for example lending against assets like cars and boats, and a lot of business lending, where the loans that are going to go bad tend to start doing so quite early in the life of those loans.

The risk of that should be built into the interest rate, if the P2P lending site is doing its job right, but it should also be taking steps to recover bad debts as swiftly as possible.

With these kinds of loans, it is often quite normal for the P2P lending sites to recover a fair proportion of bad debts, but what many people don't realise is that it can take months or years before it is able to recover – or finally write off – all the outstanding bad debts.

The effect of this is to make your returns look worse early on. You've suffered early bad debts but not earned that much interest yet, because you've just got started. You need to wait some years for your good loans to keep paying you interest.

Make sure you understand what to expect before you lend. Find out, for the kinds of loans on offer, do a lot of loans typically go bad and does that happen early or late, how long does it usually take to make recoveries, and how much bad debt is typically recovered?

Otherwise, you're going to be one more lender complaining about what is a natural and expected occurrence in some types of loans.

Those complaints can lead to a serious mistake on your part: you might sell all your good loans in disgust, which means you stop earning interest on them to offset bad debts. This leaves you just with the bad loans that the P2P lending provider is trying to recover!

3. Lenders losing money from the simplest mistake

Without a doubt, the piece of advice that the 4thWay writing team and experts give you the most by a long margin is to lend across lots of P2P lending sites. Analysis of risk-reward suggests typically at least six lending accounts.

Yet, we are staggered at how few 4thWay users we speak to actually do that. 2-3 P2P lending sites is the norm, and over 80% of our users lend in less than six – and that deeply concerns the entire team here.

Some of 4thWay's users that are putting all their eggs in just one or two baskets have complained to us that they have had poor results, or even losses, and so they are frustrated at the P2P lending sites for letting them down. Most likely, they are also concentrating their money in too few loans within each lending account, which increases the risks far more than you could imagine.

While the situation is not widespread yet, it is just the beginning:

The number of people suffering from bad luck simply because they have unnecessarily concentrated in too few loans and just a handful of P2P lending sites is going to skyrocket when the next recession comes. Please don't be one of those people.

More:

If you want to avoid more P2P lending mistakes, read The 12 Key Peer-To-Peer Lending Risks.