For a lender, the key risks are as follows:
- Borrower risk: If the borrower is unable to repay its debt, its lenders may lose all the money that was lent out. To reduce this risk, a borrower can choose to lend to loans with lower risks.
- Platform risk: If the platform goes bankrupt, a lender may lose all his cash that is held by the platform. The use of escrow agent can mitigate this risk. Also, a lender can do regular transfers of cash back to his/her bank account.
- Underwriting risk: If the platform is unable to assess the risk of the borrower correctly, lenders may end up inadvertently lending to a high-risk borrower. To reduce this risk, a lender can observe the default rates and understand the credit process of each platform.
- Fraud risk: The borrower or the platform can turn out to be fraudulent.
- Legal risk: If the agreement between the borrower, lender and platform is not properly drafted, an investor may not be able to effectively pursue back his/her money.
- Regulatory: The government may introduce new rules the industry.