Risks

Individual loan scam - where a loan has been passed through by a platform and due diligence has not been correctly performed.

Valuation Risk (secured assets) - where the valuation is incorrect or overly optimistic. 

Government interference.

Like any uncertainty this cuts both ways, but I predict

1. Nanny State will feel the need to protect us from ourselves.
2. Tax declaration will not continue to be left to the discretion of the investor.

Unlike many of the previous points, bigger platforms which deal with the wider public are more likely to attract big brother's attention.

Unless I'm misunderstanding the point, that is only 'a risk' if one is currently operating on the basis of not declaring as required by law and therefore factoring tax evasion into ones calculation of risk/return.

And I cannot see a way round this when every penny counts when the asset is disposed of. This is more of a problem when the LTV is too marginal when or if things go wrong. I've reassessed my holdings and decided 70% LTV is too high especially when applied against some property loans with the squeeze gradually being made on the returns on offer. As more P2P's enter the BL market then those rates will go lower - so not for me.

Thanks everyone - all good points. But nobody has attempted the estimation of returns net of losses. In my initial post I made some guesses based on the nominal interest rate offered, but of course there will be a variation with platform competence and luck. Logically one should invest in the platform with the highest net return, even if that involved large losses, but I see that most of the p2p money goes to the platforms with the lowest risks. So maybe my guesses were too optimistic about loss levels. After reading all the other risks you have all come up with I think that's probably the case.

With the riskier, high interest platforms like SS it is probably not possible to give an average net return figure which is of much use because the variation will be too great. Some lucky people will get 12% and some unlucky people will lose a chunk of capital. I would advise anyone on that platform to diversify across as many loans as possible to protect against the most likely of the many risks - individual loan default. This will mean naturally that they will greatly increase the chances of having some losses, so it is perhaps a dubious protection but it is the one normally recommended.

In my revised net return table I will assume that maximum diversification has been achieved, and I split the returns into 3 groups, unlucky, average and lucky.

Rate offered                Likely net return                           Return if lucky                                    Return if unlucky
<4%               <4% (almost same as offered)            <4% (almost same as offered)                          0%
4-6%                4-6% (maybe 1% less than offered)      5-6%                                                          -5%
6-8%                4-6% (maybe 2% less than offered)      7-8%                                                          -10%
8-10%               5-7% (maybe 3% less than offered       9-10%                                                        -20%
10%+                6%+ (maybe 4% less than offered       10+%                                                         -30%

Please give your opinions!

It is far too early to say. Only one company (zopa) has been around long enough to cover an economic cycle. Most platforms haven't been here for 3 years, never mind the 5 year length of their loans. Who knows what will happen when rates start climbing over the next few years.

And don't forget tax. The higher yielding, but riskier loans are not very attractive for taxpayers, and higher rate taxpayers especially so. I don't know what the money averaged tax rate is for P2P lenders. This makes provision funds more attractive to taxpayers.

Possibly in 10 years we will know what you are asking now, but even then a risky platform might have got lucky or vice versa.

There is also a high chance that the market will change significantly. In the next few years there will be at least one election, possibly more. Pension money might be withdrawn and placed into P2P. If ISAs are introduced there might be a significant increase in money arriving. Regulations might change. Companies might list and change their strategy. Strong competitors will arrive, Hargreaves Lansdown have announced this, it is easy to think that others might too, how about Virgin Money, Tesco, Coop, it is easy to think of a few other names who might be credible.

If a company has a few hundred loans, talking about default rates of 1% seems statistically meaningless to me.