Is Peer-to-Peer (P2P) Lending a Scam?

Is Peer-to-Peer (P2P) Lending a Scam?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated November 19, 2021

While Peer-to-Peer lending is relatively new in Canada, online P2P platforms are now popping up across the country and have become popular places for Canadians to borrow funds or invest in others. All that said, there’s a chance that the borrower is getting a better deal out of the process than whoever is lending their money.

In fact, some people think that Peer-to-Peer lending is a total scam, particularly for the investor. Keep reading to find out if those rumours are true. 

What is Peer-to-Peer Lending?

Peer-to-Peer lending allows you to borrow various types of loans from anonymous investors. Like a personal loan that you get from a bank, you’ll then have to repay your P2P loan through a series of divided installments (depending on the type). Afterward, the investor makes a return on the interest and fees that your debt generates.

Peer-to-Peer lending has become popular for many Canadians because:

  • Loans often have easier requirements than they do with banks or credit unions 
  • Borrowing rates and fees can be lower than they are with traditional lenders
  • Responsible payments may do wonders for a borrower’s credit
  • P2P investors can charge higher rates to maximize their returns
  • Those returns are sometimes better than with other types of investment accounts
  • Investors can also disburse small amounts of funding across multiple loans

Find out what are lending circles.

What Are The Problems With Peer-to-Peer Lending?

As appealing as Peer-to-Peer lending sounds on the surface, many investors and borrowers still think it’s a scam because of these kinds of problems:

Problems From the Investor’s Perspective

  • Types of Borrowers Who Rely On Peer-to-Peer Lending – Because they sometimes offer easier requirements, P2P platforms typically attract “risky” borrowers, meaning people with bad credit, low income, or debt issues. 
  • Minimal Borrower Information – Unlike the level of security you would see at your bank, some Peer-to-Peer lending deals offer up scarce details about the potential borrowers. However, this depends on how the P2P platform operates.
  • High Risk of Defaulting – Borrowers with bad credit and weak finances have a great chance of missing payments, especially if your rates are high. Plus, you have limited information about them and could lose your money if they default.
  • Collection Costs May Apply – When a client fails to pay off their loan, you might be subject to debt collection fees from the Peer-to-Peer platform that you’re using. The more money left owing, the higher those fees are likely to be.   
  • Less Protection – Your P2P loan won’t be protected by bank-grade insurance, so losses are not covered. In addition, you can’t charge prepayment penalties or write losses off on your income taxes (like you would with a regular investment).

Problems From the Borrower’s Perspective 

On the other hand, the Peer-to-Peer lending process isn’t nearly as problematic for the borrower. That said, there are still a few important things to watch out for, such as:

  • Potentially High Rates – As mentioned, P2P lenders are able to charge high-interest rates, which can yield better returns. Borrowers with riskier credit profiles, low incomes, and debt problems are generally subject to higher rates.  
  • Unfavourable Loan Conditions – Unless you have no other choice, borrowing a P2P loan isn’t always the best option, simply because private lenders can set their own terms, rates and fees, which might not be as good as those of a bank.
  • Reduced Credit & Unmanageable Debt – If you default on your loan and your P2P lender reports to Canada’s credit bureaus, your credit could be in danger. Plus, you may be stuck with a bunch of loan principal, interest and fees to pay. 

In the end, this summary of Peer-to-Peer lending problems is more for the benefit of the investor, who might be taking a much bigger risk than the borrower is.

Check out P2P lending on Reddit.

Is Peer-to-Peer Lending a Scam?

Technically, no. Most P2P lending platforms are not scam websites (although you should always do research before giving away personal or financial information). However, investors are taking on a certain amount of risk. Borrowers may refuse to pay or even pay their loan ahead of schedule, diminishing the potential returns. 

Check out the best P2P lenders in Canada

If you are a Peer-to-Peer investor, here’s what you can do to reduce those risks:

  • Diversify Your Holdings – Remember, as a P2P investor, you can disburse small amounts of money across multiple loans to maximize your returns but lower your chances of ending up with a large unpaid debt on your hands.
  • Choose Your Borrowers Wisely – If you’re worried about scam artists and high-risk borrowers, you can select potential clients that have larger, more stable incomes, better credit scores, and lower debt-to-income ratios.
  • Charge Fair Rates – Don’t forget, higher rates can equal higher odds of borrowers defaulting. To avoid a bit of extra risk, it might be a good idea to charge interest rates and fees than regular people can actually afford. 
  • Offer Debt Consolidation Loans – Borrowers who use their loans for everyday purchases often have worse spending habits and are more inclined to let the debt pile up. Picking clients who are specifically paying down debt may be safer.

Are The Returns From Peer-to-Peer Loans Worth it?

Essentially, Peer-to-Peer investing is only a good idea if you truly understand the risks you’re taking. After all, what’s to stop a scammer or bad credit borrower from creating a fake profile or only paying back a portion of their debt?

However, if you take care when choosing clients and don’t invest more money than you can afford toward loans that may not pay off, you can see decent returns. If you’re trying to be a serious investor, it’s probably not a great idea to rely solely on P2P loans. Look into lower risk investments to really diversify your portfolio and maximize your profits.  

Thinking About Getting Into Peer-to-Peer Lending?

While Peer-to-Peer lending might appear to be a scam on the surface, the investor may actually be the one who’s taking the most risk overall. Borrowing P2P loan products can also lead to some significant costs, so it’s best to act responsibly and only take on debts that you can pay for comfortably. 

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Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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