Been dreaming of a loan without the fuss of a bank?
What is peer-to-peer lending and how does it work?
Peer-to-peer lending (also known as P2P lending) essentially allows people to borrow money from other people who are looking to invest, rather than financial institutions such as banks. These borrowers and investors can be individuals or companies.
While the concept is relatively established in the United Kingdom and America, it has only started popping up in Australia in the last few years. P2P platforms act as a kind of middleman, connecting “borrowers” and “investors”, and sometimes providing some assurance to both parties involved.
The platforms usually make their money by either taking a cut of the interest charged to the borrower, charging a platform fee, charging an application fee, or charging some combination of all these fees.
Who are the Australian P2P lenders?
In the 2016/2017 financial year, ASIC reported almost $300 million in P2P loans. So, who exactly is doing all this lending?
- SocietyOne: In March 2019, at just seven years old, SocietyOne reported that it reached $600 million in loan originations.
- MoneyPlace: Boasts loans that are “tailored to match your individual situation.”
- RateSetter: With a bunch of awards under its belt, RateSetter offers a Provision Fund, which it markets as helping protect your investment.
- Harmoney: Prides itself on its mission to turn lending upside down.
- ThinCats Australia: With a strong relationship with the successful ThinCats UK business, ThinCats offers secured business loans to Australian companies.
- OnDeck: Offers short-term business loans in Australia, the US, and Canada, and has been here since 2015.
- Bigstone: Currently offers one-hour conditional approval for loans up to $100,000 and aims to makes funds available within 24 hours.
- Marketlend: Committed to “creating a business world where obstacles to financial transparency, fairness, high returns and efficiency are vanquished”.
- Wisr: Claims to be Australia’s first neo-lender. Their tagline is “a smarter, fairer, Wisr way to borrow”. (Cute.)
What are some risks for investors?
When a borrower applies for a loan, the platform provider (or someone on its behalf) generally performs a series of checks on them, which could include their credit history in order to make an assessment of their ability to repay the loan. However, they don’t necessarily disclose that information to investors. So, if you become an investor, it’s worth keeping in mind there’s always a chance that you won’t get your money back on the expected date — or at all.
It’s also important to note the risks involved with investing through a P2P platform. It’s not the same as depositing money in a bank. Unlike when you deposit money into a savings product, there is no government guarantee with P2P lending.
What to look out for if you’re thinking of borrowing
- Check the comparison rate. The comparison combines the rate with (some of) the fees to show you the true cost of the loan. This calculator can also help you compare with other lending products in the market.
- Check for hidden fees. Always do your homework! Even the comparison rate might not include all the fees. Keep an eye out in particular for early exit fees, which might apply if you finish paying off the loan earlier than scheduled.
- Flexibility. Some loans offer flexible features such as fee-free additional repayments, redraw capability, and flexibility in the payment schedule.
...and if you’re thinking of lending
- Check to make sure the platform has an AFSL (Australian Financial Services Licence). As most of these platforms are set up as managed funds, they are generally legally required to have one of these. (You can check that here.) Holding an AFSL means they are required to be compliant with a number of obligations including in relation to training, risk and compliance management, insurance, resourcing, and dispute resolution.
- You can also double check here if a scheme is actually registered with ASIC.
- Before you put your money anywhere, read the PDS (product disclosure statement). This will generally give you important info such as whether the loans are secured or unsecured, how the interest rate is determined, what the fees are, what happens if the borrower defaults, and what happens if the platform fails.
- Remember that the platform is not lending its own money. It’s lending yours. Which means you’re the one taking on the risk if the borrower defaults, which is possible, even if you choose a “low-risk” option. Ratesetter has a Provision Fund in place, which is designed to reduce the risk for investors, however, there’s not enough in there to cover all the loans, so your money may still be at risk.
Important! We’re sharing with you our thoughts on P2P platforms for your informational purposes only. We are not making a recommendation to lend or borrow using a P2P platform. Past performance isn’t a reliable indicator or guarantee of future performance.