Ba­sics of peer-to-peer lend­ing

Reader's Digest Asia Pacific - - Contents - BY GREG BAR­TON

In re­cent years, peer-to-peer (P2P) lend­ing has be­come the poster child of the al­ter­na­tive fi­nance in­dus­try. In a 2015 re­port Mor­gan Stan­ley pre­dicted that such mar­ket­place lend­ing would com­mand $150 bil­lion to $490 bil­lion glob­ally by 2020. If the P2P phe­nom­e­non has es­caped your at­ten­tion, now might be a good time to take note.

WHAT IS IT?

P2P lend­ing is the prac­tice of lend­ing money to in­di­vid­u­als or busi­nesses through on­line ser­vices that match lenders – in­vestors – di­rectly with bor­row­ers, en­abling both par­ties to cir­cum­vent tra­di­tional providers such as banks. Lenders typ­i­cally achieve bet­ter rates of re­turn, while bor­row­ers – in­di­vid­u­als and SMEs (small- to medium-sized en­ter­prises) – get ac­cess to flex­i­ble and com­pet­i­tively priced loans.

WHAT’S THE RE­TURN?

For in­vestors, the ben­e­fits are at­trac­tive. Be­ing matched with a bor­rower can take any­where from a few days to a few hours. And where a bank might typ­i­cally earn un­der 2% on per­sonal lend­ing, P2P re­turns can be more than three times that. An­thony Nantes, CEO of Aus­tralian P2P pioneer Direc­tMoney, says that while their in­vestors fall into two dis­tinct groups – re­tirees (or those close to re­tire­ment) and high net worth mid­dle-aged pro­fes­sion­als – they share a char­ac­ter­is­tic: “They are drawn to a bet­ter model of fi­nance, and the at­trac­tion of a con­sis­tent in­come stream in the 7–8% range.”

WHAT’S THE RISK?

The key word here is ‘de­fault’. When a bor­rower de­faults on re­pay­ments for any rea­son, there is no gov­ern­ment back­ing in place, as is the case with larger banks and in­sti­tu­tions, so some or all of your in­vest­ment could be lost. Rel­a­tive to other fi­nan­cial prod­ucts, the po­ten­tial re­turns are sig­nif­i­cant, but as al­ways the risks should be care­fully con­sid­ered.

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