What are the main risks of loan investments?

Any investment that yields a return carries certain risks. To successfully invest in loans, it is important to understand the main risks, so they could be minimized.

The main risks for investing in loans could be categorized into 2 areas - the risk of the particular investment and the risk of the marketplace offering the investment.

Investment risk basically entails everything related to the particular investment usually in a lending company loans or a funding project. The main risk here is that the project or a loan you have invested in will not be repaid therefore resulting in a possible loss of the invested principal and the accrued interest. Formally, this is called credit risk.

Marketplace risk relates to risk aspects where the money could be lost due to default or fraudulent activity by the marketplace itself. In this case, the underlying investment might be performing well, but because of the problems with the loan marketplace offering the investment, losses might occur. 

How to avoid the main risks?