Peer-to-peer lending platforms connect your money to borrowers and advertise yields that make bank deposits look absurd. The yields are real. So is the reason they exist.

The yield is a risk premium

Start here. A borrower paying 12% could not borrow at 5%, because a bank — with far more data about them than you have — declined. You are being paid a premium to take a risk professionals priced and passed on. That can be a perfectly rational trade. It is not free money.

Advertised versus realised

The number on the homepage is the interest rate on performing loans. Your actual return is that rate minus defaults, minus recovery costs, minus cash drag while your money waits to be deployed, minus tax.

Defaults are not a tail risk here — they are a running cost, like vacancy in a rental. A 12% book with 5% annual losses is a 7% book, and that is the number to compare against alternatives.

Buyback guarantees are only as good as the guarantor

Many platforms advertise a "buyback guarantee": if a loan goes 60 days late, the originator repurchases it. This sounds like the risk has been removed. It has been transformed.

You are no longer exposed to one borrower defaulting — you are exposed to the loan originator being solvent enough to honour thousands of buybacks at once. In good times, individual defaults trickle in and the guarantee works flawlessly. In a recession, defaults arrive together, precisely when the originator is weakest. The guarantee is strongest exactly when you need it least.

The correlation problem

Consumer lending is not uncorrelated with the economy. People default when they lose their jobs, and they lose their jobs in recessions — the same recessions that hit your equities. P2P is often sold as diversification while quietly being a leveraged bet on the same cycle.

If you invest anyway

  • Spread across originators and countries, not just across hundreds of loans on one platform.
  • Read the platform's full loan book history including recoveries — not the marketing summary.
  • Ask what happens to your loans if the platform goes bankrupt. Is there a separate structure and a backup servicer?
  • Assume your money is locked. Secondary markets seize up in exactly the scenario you would want to exit.
  • Size it as speculation.

Summary

P2P pays double digits because the risk is genuine and cyclical. It can earn its place in a small satellite allocation — but treat the advertised yield as the best case, not the expectation.