Discussion – Peer to peer lending platforms

Peer-to-peer (P2P) lending platforms is now growing in popularity. They are online investing platforms that match people or companies looking to lend and borrow allowing them to make direct arrangements between one another.

Providing intermediary services, these platforms perform the relevant due diligence risk assessments and credit checks that often include with fee charges for their services but are not part of the final lending agreement.

Some notable P2P lending platforms in Australia are RateSetters, MoneyPlace, SocietyOne, etc.

Tl; dr;

P2P lending system websites connect borrowers directly to investors (lenders), setting the rates, terms, conditions and enables the transaction. People use P2P lending services for a variety of reasons, such as for auto loans, home renovations, debt consolidation, small business loans, and many more.

These platforms are far better than what they can get from credit cards or personal loans from traditional banks.

The system and benefits of P2P lending platforms

peer to peer lending principle

Source: Finextra

A form of direct lending of money to individuals or businesses, peer-to-peer (P2P) lending also called person-to-person lending or social lending has no official financial institution involved in participating as an intermediary in the deal, matching lenders (investors) with potential borrowers.This lending system is generally done through online platform that match lenders with potential borrowers.

One benefit about P2P lending is that borrowers can get loan offers from lending websites at better interest rates compare to traditional banks with overhead costs since peer-to-peer lending companies generally operate online.

Investors get to see and select exactly which loans they want to fund.

Offering both secured and unsecured loans, most of the loans in P2P lending are unsecured personal loans. Secured loans are rare for the industry and are usually backed with luxury goods.

The following are the general steps in P2P lending process:

  • First, a potential borrower obtaining a loan needs to complete an online application on the peer-to-peer lending website.
  • Second, the lending platform assesses the application and determines the risk and credit rating of the applicant. The applicant is eventually assigned with the appropriate interest rates.
  • Third, once the application is approved, the applicant receives the available options from the investors based on his/her credit rating and assigned interest rates.
  • Fourth, the applicant can now evaluate the suggested options available and choosing one of them.

Lastly, the applicant is deemed responsible to pay periodic (typically monthly) interest payments and repaying the principal amount once it reached maturity.

Benefits and fallbacks

Some benefits of P2P lending are:

  • Higher returns to the investors relative to other types of investments.
  • For both lenders and borrowers,P2P platforms are more agile, efficient and transparent to deal with than traditional banking institutions.
  • Great option to diversify the investment portfolio of the investors much less likely to be affected by economic turbulence.
  • More accessible source of funding for some borrowers than conventional loans provided by financial institutions.
  • P2P loans have lower interest rates for borrowers due to competition between lender with lower origination fees.
  • P2P platforms offer high level of security for lender’s investment.
  • Lenders can withdraw their funds anytime.
  • P2P platforms offer greater chance of making an ethical investment.

Risks can be:

  • A lender should be aware of the default probability of his/her counter party, given the fact that most borrowers who apply for P2P loans possess low credit ratings that do not allow them to obtain a conventional loan from a bank.
  • Government protection isn’t included for lenders in case of the borrower’s default.
  • Peer-to-peer lending may not be available to some borrowers or lenders.

Summary

Peer-to-peer lending is a unique platform for borrowers and lenders, providing both with alternative options to traditional banks and building societies. Though it has its strengths and weakness, P2P lending is gaining traction and seems certain to become more popular in several countries such as China, Japan, Italy, and the Netherlands.

By Tuan Nguyen

ratesetter logo

Product review – RateSetter Australia

Recently I am aware of Peer-to-peer(P2P) lending investment type. With curiosity, I registered into a platform called RateSetter, which is a platform that acts as a broker between lender and borrower, and it operates in Australia.

After reading the PDS carefully, I feel the need to note my findings down so we can discuss the profitability of P2P lending in general and RateSetter in particular.

Tl; dr;

RateSetter is an online P2P lending platform that connects the lender and the borrower. Being backed by something called a Provision Fund, their claim to only “Lending to credit worthy Australian-resident individuals”, and the distribution of borrowers; it seems to be a relatively “safe” investment (notice the double quotes, :wink:).

Although there is no management fee for small deposits, there is a 10% fee on the interest received, and certain management fee for deposits that are more than a certain amount ($50,000).

What is RateSetter?

personal lending rates 2018

Source: RateSetter analysis, based on Monetary Policy Changes (A2) and Indicator Lending Rates (F5) datasets published
by the RBA at, October 2018.

Originated from UK, the company was founded in October 2010. Claiming to “redefining investing and borrowing in Australia”, it opened the Australian operations in November 2014. RateSetter product is a platform that manages the connections between cash borrowers and lenders. It allows lenders to deposit funds, and distribute the funds to appropriate borrowers. Because of its nature, RateSetter is NOT a bank.

Regulated by ASIC, RateSetter Australia is dedicated to investors in Australia only. Meaning you cannot deposit funds into RateSetter Australia and lend it to UK borrowers.

The platform matches lenders with creditworthy borrowers who wants a simple, convenient loan. They claim to have an assessment process that ensures the borrowers are creditworthy, and are able to afford repayments.

There are multiple products that allows your to invest into different timelines and different interest rates.

ratesetter lending products

Source: RateSetter

What is Peer-to-Peer lending?

It is the oldest form of borrowing and lending. Back in the old day, before the invention of banking, people who need quick money went to another person who has some money to spare and ask for a loan. They repay the principle and interest at a time interval, until the debt is paid off.

With P2P lending, one lender can provision funds to multiple borrowers, therefore reduces the risk of defaulting.

E.g.

A lender transfers $10,000 into a P2P platform, another lender transfers $5,000.

A borrower is approved to borrow $7,000 loan. He can take $5,000 from the first lender, and $2,000 on the second one.

This is a very simple example, in general, within a loan application, there can be multiple lenders involved. That reduces the risk whether the borrower defaults on the loan, each investor loses a smaller amount of money, instead of “losing all their eggs in one basket”.

how Peer to peer lending works

Source: Lenden club

What are the fees associated with RateSetter?

  • No fee on opening account.
  • No fee on depositing funds into your account.
  • No fee on withdrawing funds that are NOT in loan.
  • No fee on closing the account.
  • No fee associated with managing the money if you have less than $50,000 in your account.

Now the worse part….

  • 10% of gross interest that the lender earns. E.g. if received interest is $10, the platform takes $1.
  • All interests from the holding account that are NOT in loans. E.g. if you have $1,000 in the holding account and have not loaned to anyone, the platform takes all interests generated from that $1,000 in the Trust Account, with 2% interest pa, the amount comes to $20 per year.
  • Borrower fees. This is NOT applicable to lender. The amount that borrowers need to pay to finalize the loan. For 2018 Financial year, this fee equals to 4.30% of average net assets.
  • 1.5% early access fee. E.g. if you have $5,000 currently lending to people, you want to withdraw $1,000. The platform will charge $15 to withdraw that amount. It then will find another lender to fill in the blank.

Observations

  • Minimum investment is $10.
  • Good Return on Investment rate (significantly more than putting into banks), at 5 years loan, the interest rate fluctuates around 8% (real return after 10% fee is around 7.2%)
  • Reduced loan default risks through loan amount diversification. Moreover, RateSetter has something called Provision Fund, which further protects lender from defaulting actions.
  • Clear fee and business description through its PDS.
  • Easy withdrawing loan deposits through early access feature, in case you have other investment opportunities. Note that it takes 3 business days until the money is in your bank account.
  • Fixed interest rate on the loan package.
  • Comprehensive Reinvestment plan.

Summary

I have personally put in around $2,500, average $500 per month as an experiment. So far the return has been good, since the amount is still minimal.

Peer to peer lending is one of the lesser-known investment forms. Associated with high default loan risk rate, it has not been considered as a good investment. However with RateSetter, the risk is reduced so one can consider having it as a side investment, with little activities and passive returns.

By Tuan Nguyen