Peer- to- peer lend­ing is on the rise in Aus­tralia. What’s your take on it?

Townsville Bulletin - - NEWS -

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.

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