P2P Lending Sites: How Safe Are They for Borrowers?
Much has been written about safety (or lack thereof) regarding peer-to-peer (P2P) lending sites for lenders. They are, after all, the ones putting their money at risk, lending it to total strangers in hopes of generating investment income (see Can You Earn 8% Investing In P2P Loans?). Less discussion has taken place with regard to P2Ps on behalf of borrowers. How can you distinguish the legitimate lending sites from the disreputable ones?A Secure Site
Since you'll be sharing financial and other sensitive information, you'll want to make sure a site has taken measures to protect your personal data from hackers. If a P2P site has obtained security and privacy certification through companies like TRUSTe or Symantec SSL (formerly VeriSign), that's one good indicator it's reputable.
Websites that utilize TRUSTe can be verified here; Symantec's certificate checker resides here.
Investigating a lender can be tough for an individual – so why not rely on the pros' research? Many a major company is investing in the P2P business these days, and corporate investors tend not to commit major bucks without vetting a company thoroughly. Two years ago, for example, Google, Inc. invested $125 million in LendingClub Corp. (LC), a leading P2P. Other big-name investors in P2Ps have included Titan Bank, Congressional Bank and the Eaglewood Capital Management hedge fund, according to Reuters. (For more on Lending Club, see Investing In (And With) Lending Club: How It Works.)
Major investors are sometimes listed on P2P company websites. In addition, an online search of the P2P company name plus keywords such as major investors or shareholders will often reveal information linking top names with that company.Reputable Officers
Likewise, if known and responsible members of the business community have joined the board of directors, or become officers of, a P2P company, that, too, is a sign the company and its lending practices can probably be trusted. Former U.S. Treasury Secretary Lawrence Summers is on the Lending Club board, for example.
Information about a company's board members and officers is typically included with the company profile on the website. Peruse it, and see if there are names you recognize.Positive Reviews/Ratings
It always pays to see what others think od the company you plan to approach about a loan or a mortgage. (See P2P Mortgage Loans - A Growing Trend).
Several rating and review sites include P2Ps. One of them, TopTenReviews, lists ranked reviews of its top online P2P loan websites, based on a number of factors including features, eligibility, the loan process, fees, and penalties and support.
Don't forget about the Better Business Bureau (BBB). A P2P lending site's standing with this well-known nonprofit business ratings organization (based on reported complaints and the firm's handling of them) can also be an indicator of the company's reputation and trustworthiness.You can search for the specific P2P lending company name on the BBB website.Good Press
While not a foolproof indicator, the more positive press coverage a P2P lending site receives the better, especially if the coverage comes from a reputable, financially savvy publication (The Wall Street Journal, Bloomberg Businessweek, CNN, etc.). You can also glean news from sites and blogs devoted to P2Ps, such as Lending Memo, which in addition provides educational information about peer-to-peer lending and offers tips for navigating the world of P2P loans; Lend Academy (ditto); and PeerFinance101, which includes P2P personal-experience stories from readers.
As always,be skeptical; online specialists can sometimes sound a bit like cheerleaders for the P2P industry.Warning Signs
Obviously, P2P lending sites falling short with regard to any of the above-listed positive attributes should be approached with caution – if at all.
In addition, the Federal Trade Commission (FTC) warns potential borrowers to be wary of any of the following when it comes to loans in general:
– Immediate guarantees. Put simply, there should be no guarantees that you will get a loan. Ever. If you are promised a loan – especially upfront – the only guarantee is that you are probably being scammed.
– Upfront/undisclosed fees. Legitimate lenders may charge application, appraisal or credit report fees. Those fees, however, are fully and clearly disclosed. And they shouldn't be imposed before you receive the loan. To quote the FTC: Any upfront fee that the lender wants to collect before granting the loan is a cue to walk away.
– No credit check. A lender that has no interest in your credit history should raise a red flag. Legitimate lenders evaluate creditworthiness and confirm the information you provide before approving a loan.
– Lender not registered in your state. Lenders are required to be registered in all states where they do business. Checking on registration status is not complicated; the FTC suggests you contact your state attorney general's office (or department of banking) to ensure the company you're dealing with is properly registered. And while you and the lender connected in the most modern way – online – make sure you have some traditional info, such as the firm's phone number and physical address.The Bottom Line
The main premise of P2P lending – removing the middlemen (financial institutions) – also removes some protections: Federal Deposit Insurance Corp. (FDIC) insurance for lenders and regulatory guidance imposed on banks on behalf of borrowers. For that reason, evaluating P2P lending sites involves much more than being able to compare the annual percentage rate (APR) offered by a lender, and whether the application process is simple and fast.
Ultimately, it's all about conducting due diligence: both on the legitimacy of the core business and on the security of your personal data.