Peer- to- peer lending is on the rise in Australia. What’s your take on it?
FOR readers who aren’t aware of it, peer to peer ( P2P) lending is a commercial arrangement offered by various non- banking organisations to enable borrowers to tap into spare cash that investors are willing to lend.
Unlike borrowing from or lending to family or friends, there is an intermediary involved – the P2P lending platform.
There are several P2P institutions in Australia, including SocietyOne ( part owned by News Corp), Ratesetter, DirectMoney and MoneyPlace, as well as P2B ( peer to business) lenders, including ThinCats Australia and OnDeck.
The pros and cons of P2P depend on whether you’re a borrower or a lender. As a borrower with an awesome credit rating, you might be able to secure a lower- rate personal loan via a P2P platform than you can negotiate with your bank. If you have a non- existent or not- so- good credit rating, you might be able to secure a loan, full stop. As a business owner with start- up or expansion plans, you might find willing P2B lenders to help you fund them.
As a lender, investing via a P2P or P2B platform might net you a higher rate of return than investments such as term deposits or managed funds. However, unlike a term deposit, your cash investment is not covered by the government’s guarantee deposit. While P2P platforms all use various sophisticated algorithms to reduce your chance of loss, the risk is still there. IF it involves lending to friends and family, are you serious? Nothing but horror stories.
P2P lending isn’t that. It’s lending to randoms. Via the internet. No emotion. They don’t know who you are. You don’t know who they are. You can’t ban P2P borrowers from your next social gathering.
You can’t even get angry with anyone individually. When you loan money via P2P, it’s usually split over hundreds of loans.
A quick comparison of lending to P2P randoms versus direct lending to mates:
P2P randoms pay you interest. No mate ever has. In the history of the world.
Most P2P borrowers will be good risks, checked by professional credit managers. Some won’t, but in general they repay a lot more reliably than family and friends.
A lending manager manages repayments. No uncomfortable conversations with friends about when the money might be coming back.
Borrowers via P2P need to pay you regularly or risk adverse credit reports. Mates work on the theory you’ll eventually become uncomfortable asking, or sick of hearing “I’ll pay you back after next month’s pay.”
P2P lending managers claim the default rate is just a few per cent. What percentage of debts to friends and family get written off ?
It’s an industry in its infancy in Australia. It’s not a recommendation, but this could be one to watch – especially for those sick of seeing near 2.5 per cent returns on cash at the bank. WHEN it comes to lending and borrowing, the way it gets done can be a distraction. When we were young, cards like American Express and Diners Club had a certain glamour: you could pay for things using a piece of plastic without cheque book or cash. Then the banks started issuing Visa and MasterCard, giving you a line of credit in your pocket.
Of course, these cards represented highinterest, unsecured debt. Every time you used one, you were borrowing.
It’s worth remembering this when looking at P2P lending. It uses online platforms that look like a blend of social media and financial services. Their role is to bring together those who want to lend money and be paid interest (“investors”) with people who want to borrow.
P2P lenders claim that with their smart technology and lower cost overheads, they can lend money at a lower cost than mainstream lenders. They can get to know a borrower and reward the good ones with lower interest rates and better terms. Most P2P lenders show an interest rate on personal loans lower than the comparison rate.
But regardless of who lends you money, you have to ask yourself: can I afford this, and should I afford this?
Whether you’re getting a mortgage or car finance, you have to make your own calculations about loan serviceability and look at why you’re borrowing. Debt costs you money so always be clear about what it’s for.