What risks are associated with investing through LoanMarketplace?

1. Credit risk/Default risk.

There is a possibility that the borrower will not make future scheduled payments; as a result, the investor may lose part or all of the investment made. The amount of possible loss, if any, would depend on the type of loan. For example, in the case of default on a secured loan, such as a mortgage or car loan, the repayment of the loan would be made by first realizing the collateral, and second by trying to recover outstanding amount from the borrower; this should result in a lower loss of funds, if any.

2. Cash flow timing risk.

All payments from an investment in a loan are directly linked to the actual payments done by the borrower. There may be situations in which the borrower makes a payment after the scheduled payment date; as a result, the investor may receive cash flows later than expected.

3. Prepayment risk

The borrower usually has an option to repay the loan early, which is usually done by repaying the principal and accrued interest up to the date of early repayment. In the event the investor had made the investment at a premium, the unamortized part of the premium would be lost.

In order to minimize any of the above-mentioned risks, investors can diversify their investments across different borrowers, loan products, loan originators, and geographies.