Following the news it is quite obvious a slowdown of the world economy is ongoing. It may turn out to be a recession in the Euro area.
So how will P2P lending be impacted by a recession?
At the last recession, the financial crisis 2007-2008, P2P lending was rather new. Lending Club in the US was fully operational and it is interesting to study the yield that Lending Club investors got during the financial crisis. As can be seen in the table, it was positive although not very high. Effectively this means credit losses were limited and covered by the interest payments.
We can also study the yield on credit card loans during recession. During the last recession, the default rate for credit card debt increased from 4% to 11% but this was still well below the 14% average interest.
The conclusion from studing the last recession is that consumer credit is fairly robust. That said, the next recession may be more severe and I will now examine a few strategies for minimizing the risk.
- To protect investment and minimize risks, it is wise to monitor unemployment closely. Rising unemployment is the canary in the mine, rising private credit defaults will follow. For P2P investors, credit losses will rise. The connection is the obvious one, unemployed people can often not pay their interest.
- If the unemployment rate is rising, one defensive strategy is to shift from higher yield and lower credit rating to lower yield and higher credit rating. Higher credit ratings are far less likely to default, this is true for all market conditions.
- If recession is putting pressure on the P2P industry, the risk of platform default will increase. One defence for this is to diversify the portfolio. This is something I am currently doing as a preventive measure. I am currently investing in 12 different platforms.
- Different countries may get hit more severely, it could be a wise strategy to reduce exposure to the countries where the unemployment rises fast.
To predict the future is not possible but judging from the past I think the P2P industry as a whole is quite robust.