6 Peer Lending Contract Gotchas
- Total Loss Risk: HIGH Borrower defaults mean you lose your investment. No FDIC protection. Principal at full risk
- Platform Fee on Returns: MEDIUM Platform takes 1-5% of your interest earned. Reduces already modest returns significantly
- Illiquid Investment: HIGH Cannot withdraw funds until loan matures. May be locked in for 3-5 years
- Collection Limitations: HIGH Platform controls collection efforts. Limited recourse if they stop pursuing delinquent borrowers
- Grade Reassignment: MEDIUM Loan risk grades can change after investment. Your A-grade loan may become C-grade
- Tax Complexity: MEDIUM Interest income taxable even on defaulted loans. May pay taxes on money you never received