P2P lending risks include the potential credit and borrower default risks, platform and counterparty risk that disrupts operational stability and cashflow, liquidity risks due to the delays in selling claims or an early exit from investment. Beyond that, regulatory and legal changes induce the related framework risks. Concentration and macroeconomic risks that affect borrower performance are also in the list.
The question of whether peer to peer lending is safe is a matter of careful risk management and individual consideration. This kind of investment may offer higher returns provided that all the risk categories are identified and mitigated. This block reviews main risk categories that are important to consider before making a decision to try P2P investment — borrower behavior, platform infrastructure, market and assets’ liquidity, regulatory environment, and macroeconomic conditions.
P2P lending can result in partial or total loss of capital. Key risk categories:
The risk of default is one of the fundamental concerns in P2P lending because, if a borrower fails to repay the money, an investor may lose both the initial funds and the potential returns. Credit risk can appear in two forms: the borrower may genuinely become bankrupt due to financial hardships or refuse to honor the agreement and not pay intentionally. Credit risk becomes real when a borrower stops meeting financial obligations in either of the two described ways. The severity of the incurred loss depends on the borrower’s financial position, recovery costs, and the current market conditions.
Traditional financial institutions like banks have a mechanism of mitigating this risk through the demand of collateral alongside a complex credit-rating assessment system. On the contrary, P2P investment platforms often operate within the framework where a limited assessment system is available. The platforms often offer loans that are not secured, which can increase potential losses if the investment is misvalued.
Instead, the platforms use other tools to provide protection to their clients, including assigning risk grades to loans and adjusting interest rates based on the probability of default. Maclear applies due diligence procedures and assigns each loan an internal credit rating on an AAA-to-D scale, where AAA denotes the lowest credit risk and D denotes default. The risk assessment considers multiple factors, including loan repayment capacity, the overview of the project (its characteristics), and the availability of collateral.
Maclear also utilizes LTV ratios and collateral as additional tools to reduce credit risk. Assigning lower LTV ratios helps to provide a larger loan value of the asset buffer. Collateral values provide an additional security layer. Still, collateral values fluctuate, and recovery is not guaranteed.
To illustrate how credit and borrower default risk materializes, consider a simplified example of a €1,000 investment that is distributed across multiple P2P claims.
A borrower is unable to repay the loan and enters default, which, in turn, triggers the platform’s escalation process. After 3 days have passed, Maclear begins preliminary collection efforts and continues to provide interest to the investor through the Provision Fund. After 30 days, Maclear initiates soft debt collection and continues the compensation of the interest through the Provision Fund. After 60 days, the final threshold, legal recovery proceedings that include the enforcement of collateral, begin.
In this example, collateral is only partially covered. The investor receives only a part of the outstanding principal. If the outstanding amount cannot be collected and the Provision Fund does not fully cover it, the remaining collected amount is distributed pro rata among the affected investors. It is possible to calculate the expected return metrics ex-ante, including AROI, but these metrics would represent the expected returns based on a projected performance rather than a guaranteed outcome.
Illustrative example only. Actual recovery depends on borrower performance, collateral realization, and Provision Fund capacity, and may differ materially. Returns are not guaranteed, and capital is at risk.
Maclear follows a structured escalation process in case a payment delay occurs. It consists of the three stages — 3-day delay, 30-day delay, and 60-day delay thresholds.
After 3 days of delay, investors may continue receiving the return on their investment through the Provision Fund, the value determined by the fund’s available capacity while preliminary recovery procedures are set off. After 30 days of delay, the case of recovery moves to soft debt collection while the payments from the Provision Fund continue. After 60 days, the procedures of collateral enforcement and legal proceedings on the case may begin. Maclear at this stage acts as Collateral and Collection Agent and enforces the pursuit of available recovery measures under the agreements. After the collateral is realised, if there is a shortfall, the recovered amount is distributed pro rata among the affected investors; the remaining funds may be lost. This mechanism is a structured risk mitigation process, not a guarantee of a full return.
The investors themselves bear the credit risks that are associated with borrower performance since the return of the invested funds in cases when the risk materializes is not guaranteed.
Platforms like Maclear may try to mitigate the potential risk by offering mechanisms like Provision Fund (not a buyback guarantee), introducing internal credit risk scoring, and offering LTV and collateral. Yet, none of these instruments completely eliminates the probability of the invested funds’ loss.
Platform-related risks are also a part to be cautious about. Platforms can cs that arise from operational, technical, or systemic issues that are data leaks or data disruption, hacking, and other cybersecurity threats. The risk materializes if any of these issues happen, in which case the investor may temporarily lose access to the information about a particular project, have their data stolen, or be unable to receive payments.
Mitigation of the risks connected to the platform involves choosing the one with the robust safety measures, clear and transparent GDPR policy, and trustworthy and stable transaction system. That’s why Maclear utilizes a framework that incorporates transparent due diligence procedures, segregation of assets, and keeps the documentation on the contracts between the investors, borrowers, and the platform that serves as a financial intermediary. PolyReg SRO membership makes Maclear comply with the Swiss regulatory standards and forces it to operate under a transparent framework.
Another risk category is liquidity risk. These risks involve any potential difficulty with accessing or converting the invested capital into cash, early withdrawal penalties, forced discounts, and post-purchase lock-up periods in certain cases. Unlike stocks, P2P loans have fixed terms that complicate earlier withdrawal. P2P investments are illiquid before maturity by default.
Liquidity risk materializes when the investor cannot find a buyer who will purchase the claim before the loan matures, so the investor cannot withdraw cash before it. The investment this way can remain unrealized and can require additional discounts to attract buyers who are willing to purchase. As a result, if the investor sells with a discount, they suffer a potential reduction in realized returns. Maclear provides the investors access to the Secondary Market where they can offer claims to the other investors. Buyer’s protection includes a 30-day post-buy lockup. Secondary Market improves the possibility of an earlier sale, but Maclear does not guarantee that a listed claim will be sold.
Yes, you can lose your invested funds in P2P lending, as P2P investment remains illiquid until the loan matures, by default.
This means that the investor cannot get the liquidity early on, meaning that, if an early withdrawal that results in the selling of the claim occurs, it may come with the costs and penalties. Maclear’s Secondary Market tries to mitigate the risks of early exit by providing an opportunity to sell to the other investors early but does not guarantee the full return of the funds.
Another category refers to regulatory and legal risks that involve changes in lending laws, compliance requirements, and the rules of regulatory oversight.
All these aspects may impact both the users of the P2P platforms (both borrowers and investors) and the platforms directly.
The risk can materialize with the implementation of new compliance requirements, changes in investor protection, changes in cross-border investment policies, or disputes regarding the claim assignment. Another way is the evolving tax landscape — if a canton in Switzerland changes its rates or the mechanism of calculation, these changes may result in additional payments or documents from the investor. For example, the ECSP EU-wide regulation on the claims assignment and the responsibility of an NCA for the enforcement in the EU states differs from the Swiss SRO framework indirectly supervised by the federal financial authority FINMA.
Maclear mitigates these risks by operating within SRO-model, working as an affiliated member of PolyReg SRO. The organization's oversight over Maclear supports compliance with applicable regulatory requirements, including KYC, AML, and GDPR operational standards. Overall, SRO membership allows Maclear to maintain a transparent and up-to-date framework of regulatory operation in Switzerland, reducing the risks related to regulatory and legal matters.
Concentration and macroeconomic risks refer to the insufficient diversification of the assets as well as the exposure to broader economic conditions that affect investment performance. Diversification lowers the risks that are non-systemic but does not eliminate systemic or macro risk. The risk emerges if the investor allocates the funds to a narrow number of borrowers and sectors, thus increasing the sensitivity of an investment portfolio to macroeconomic cycles like recession, inflationary pressure, or interest rate changes.
Concentration and macroeconomic risks materialize when correlated defaults occur with external macroeconomic pressure increasing the borrower's stress. This way, the assets that have been providing higher liquidity earlier may deteriorate significantly in terms of returns. Concentration risk happens when too much capital is exposed to a similar risk profile and a limited number of borrowers, which results in a potential deterioration of the portfolio’s condition in case of a single adverse event. On the contrary, macroeconomic risk affects the entire lending environment and cannot be solely mitigated by borrowers’ diversification.
Maclear provides the tools to reduce concentration and macroeconomic risks, including AutoInvest. AutoInvest allows the lenders to distribute capital across a broader set of projects and sectors. Diversification reduces exposure to individual borrower default due to economic turbulence or systemic difficulties on a macroeconomic level but does not eliminate the market-wide stress conditions overall.
Evaluation and reduction of P2P lending risks requires the analysis of the various aspects that contribute to a higher risk profile, including scoring the credit rating of a borrower, understanding the mechanisms of the platform's operation, the legal framework of P2P in a jurisdiction, the mechanisms to mitigate against liquidity losses, and overall market conditions. Below is a checklist that can help an investor assess the P2P risks before making an investment decision.
1) Checking credit and default risk potential. It is worth looking at the platform’s way to assess borrowers and the data on default rates, if it is available. Besides, it is worth checking how losses resulting from the borrower’s default are handled. Maclear mitigates the risk by scoring borrowers internally on an AAA-to-D credit rating scale, introducing collateral backing with a structured default escalation procedure (3, 30, 60-day thresholds), and the existence of the Provision Fund to support delays.
2) Verify platform and operational safety. The assessment of whether the funds of an investor are legally separated from the balance sheet of the platform is a good starting point. The understanding of the regulatory oversight that is applied to the platform also helps to reduce the risk of P2P investment. Maclear tries to reduce this risk by being an affiliated member of PolyReg SRO and by separating its role as an intermediary (platform operator) and Collateral and Collection Agent in case of a dispute.
3) Test of the liquidity conditions. It is safer to assume that the investor cannot exit early unless given the context of this possibility. Secondary markets can serve as optional liquidity tools but are not the exit guarantees. Maclear tries to mitigate liquidity risk by introducing a 30-day post-buy lockup period and maintaining transparent resale conditions. Maclear Secondary Market includes variable pricing with potential discounts but does not guarantee a buyer.
4) Understanding of the legal and regulatory structure. This reduces the risk by letting the investor understand what legal structure supports the existing claims and which jurisdiction enforces the regulatory and legal requirements. Maclear operates within the framework of the structured Claim Assignment Agreement and Swiss AML, KYC, and GDPR policies overseen by PolyReg SRO under the indirect supervision of the national financial authority FINMA.
5) Evaluation of possible diversification and macro exposure. Investors should check if it is possible to spread investments across borrowers, sectors, and regions to reduce the concentration of the funds in the projects with the same risk category. Maclear mitigates this risk by supporting the AutoInvest tool to help the investors diversify across multiple claims, check the logic behind portfolio distribution, and allocate funds based on prior risk assessment.
The risks of P2P lending involve borrower default risk, platform risk, liquidity, regulatory, legal, concentration, and macroeconomic risks. All the risks carry a distinct profile that needs to be assessed carefully before an investor decides to make a P2P investment decision.
Peer-to-peer lending is not risk-free and is not completely safe. There is always a possibility that an investor loses the allocated funds either partially or completely. Assessment of the borrower’s financial situation, current market conditions, platform’s infrastructure, legal and regulatory framework, and possibilities of liquidity maintenance helps to reduce the risks related to P2P investment.
Maclear assigns an internal AAA-to-D credit rating to the borrower. The platform also uses collateral and LTV options alongside due diligence to reduce platform-related risks and tries to mitigate liquidity risks by the Provision Fund, Secondary Market, funds segregation, and gradual escalation with 3, 30, and 60-day thresholds.
No, the Provision Fund is not the same as a buyback guarantee. The Provision Fund allows the investor to continue getting returns in case of a borrower’s potential default, but it does not guarantee the return of the funds.
Selling P2P investment early comes from the inability to find a buyer, the losses of the interest, or the discounts that lead to the partial loss of the investor’s funds. Although Maclear’s Secondary Market exists to try and mitigate the risk, it does not provide a guarantee that an early exit will be possible and the investor will be able to keep their interest.
6) How do you choose a lower-risk P2P platform?
In order to choose a lower-risk P2P platform, it is necessary to consider whether a platform has internal scoring of a credit rating of a borrower, the mechanism to keep the platform’s operational flow consistent, and whether the platform has certain mechanisms to try and mitigate liquidity-related and legislation-related risks. Besides, the assessment of the general macroeconomic conditions is important. Maclear uses an internal AAA-to-D credit rating for borrowers, operates within the SRO-regulated framework, has Secondary Market, Provision Fund, a default escalation timeline, and other instruments to try and mitigate the risks related to P2P investment.
The content of this article is provided for informational and educational purposes only. It does not constitute investment, financial, tax, or legal advice. P2P lending and crowdlending investments carry a risk of partial or total capital loss. Past performance is not indicative of future results. Liquidity on a secondary market is not guaranteed. Readers should conduct independent research and consult qualified advisors before making any financial decisions. Availability of products and services may be restricted in certain jurisdictions.
