Why Are So Many People Defaulting on Online Loans?

Posted on November 23, 2016 at 12:00pm by
Should you monitor your credit?

Startups that provide peer-to-peer loans (P2P loans) through online services might be in serious trouble. Delinquencies and defaults on P2P loans are spiraling out of control. According to a recent article in Bloomberg, people are defaulting on these loans faster than expected.

How does P2P lending work? At the simplest level, it would be like lending money to a friend or coworker, except that it would be a real loan instead of a favor.

Startups using P2P lending magnify this process by connecting thousands of investors to borrowers who are looking for loans. Individuals or institutions can select specific loans to fund and make returns. Borrowers using P2P loans can be individuals or businesses. Depending on the company offering P2P lending services, borrowers go through credit checks, and receive some assistance paying back debts.

There are some risks with P2P loans. Lenders do not perform the same types of credit checks used by banks, so they can offer loans to borrowers with lower credit scores. P2P lenders can also offer larger loans to consumers than banks.

P2P lending companies have come under scrutiny from people with decades of experience in the finance and banking industries. Steve Eisman, an investor famous for betting against the mortgage bubble, has claimed Silicon Valley has no experience handling loans. Unlike traditional loans offered by banks, it is difficult to predict how P2P loans will perform.

Can You File for Bankruptcy on P2P Loans?

Typical P2P loan amounts for consumers with high credit scores range from $20,000 to $30,000. Loans for businesses average $100,000 to $200,000. People with P2P loans can face the same unaffordable life circumstances as borrowers using regular bank loans. Business can slow down or they may go through a divorce or accumulate medical bills.

P2P loans are unsecured personal loans. Unsecured loans are not backed by collateral, such as a house, car or other piece of property. People and businesses who have overwhelming P2P debt can file for Chapter 7, Chapter 13 or Chapter 11 bankruptcy. Depending on the situation, this debt can be discharged outright, or reorganized through repayment plans.

The Kansas City bankruptcy attorneys at The Sader Law Firm can help people struggling with their finances find ways to manage debts.