Investing in Unsecured Personal Loans

The first P2P platforms were based around unsecured lending so anyone that's been investing for a while will likely have some investment in platforms that provide unsecured personal loans. In some cases those platforms might also offer some secured loans.

As with any loans you're reliant on someone doing the required due diligence on the borrowers. With some platforms that'll be the platform on others it might be you as a lender but in both cases you need to ensure that the required due diligence is being performed (don't just blindly trust that the platform is doing a good job).

You should then look at the various platforms to see how the risks of defaults is managed. With unsecured loans those defaults will mean a loss somewhere: In some platforms¹ the loss has been covered by a fund so you don't see the direct effect of the default (but the fund will have been generated by the difference between what the borrowers pay and the lenders receive). In other platforms the loss will be passed onto borrowers with the assumption that profits on other loans² will cover the expected losses. Remember that even with a secured loan you're reliant on the value of the security being able to be realised so there is still a potential for losses.


There was another recent thread on getting started in P2P investing which has plenty of good advice.
p2pindependentforum.com/thread/18292/brand-new-investing-looking-guidance


Notes:
¹ Of the two platforms that did this one has sold off the entire loan book and is winding down, the other removed that fund several years ago as the reasons for it had gone.
² One of the early platforms aims to spread the money you invest over a large number of borrowers by making up a single borrower loan from multiple lenders (so a £1000 loan might only take £10 from each of 100 lenders). In this case you would lose a maximum of £10 and the interest from other loans would cover that loss.