Daniel Foggo, CEO of RateSetter
Peer-to-peer (P2P) loans provide a platform for matching borrowers with investors. By using smart technology, P2P lenders can reduce the inefficiencies of traditional lenders. Sometimes this can translate into a more competitive interest rate for borrowers and a competitive return for investors.
Well established abroad, P2P lending first appeared in Australia in 2012. Since then, it has grown in leaps and bounds as more and more Australians use P2P lending to invest and borrow. .
How does P2P investing work?
P2P (or peer-to-peer lending) is an online marketplace, bypassing traditional credit providers (banks, building societies or credit unions) by directly matching investors, who become “financiers”. And borrowers.
Funding comes from investors, which can be individuals or entities and can be used by borrowers for a variety of reasons, including personal loans, financing a business, or building or developing properties. Essentially, borrowers sign up to receive loans from a non-traditional source (i.e. not a bank), investors become lenders in order to receive a higher return than they would normally get from accounts savings, term deposits and other investments.
How to choose a P2P lender to invest in?
There are many options for selecting a P2P market. Some focus on low value consumer loans, others on higher value business loans. Some P2P lenders offer secured loans while others offer unsecured loans. Essentially, not all P2P lenders are the same – there are many variations to meet different needs, so it’s worth doing your research to understand the different options available.
But let’s take a step back: what if you were relatively new to investing in P2P lending? Where do you start? After all, there are several P2P lenders to choose from, so how do you know which one is right for you? Here are the five things to consider before choosing a P2P platform.
1. A retail license
To operate in Australia, P2P platform operators must apply for and receive an Australian Financial Services License (AFS) and an Australian Credit License. These licenses are issued by the Australian Securities and Investments Commission (ASIC) to companies that meet certain thresholds, such as senior management experience and skill requirements; minimum working capital requirements; and the requirement to perform appropriate credit and affordability assessments. If you want to be sure that the P2P organization you plan to invest in meets the basic requirements, it is essential to verify that it has an AFS license and an Australian credit license.
2. Protection of your investment
Because P2P operators are not banks or credit unions, your investment (in a loan portfolio) is not guaranteed by the Australian government (as would be the case if you made a deposit with an authorized deposit institution, up to a certain amount). However, that doesn’t mean that P2P operators haven’t found new ways to minimize the risk of losing your investment. For example, some P2P platforms charge borrowers a risk-based fee, which is a segregated fund pool, sometimes referred to as an allowance fund. The contingency fund is designed to help protect investors in the event that a borrower misses a payment or defaults on their loan. However, a contingency fund is not a guarantee that you will be compensated.
3. A commitment to a complete credit report
Full Credit Reporting (CCR) or what is sometimes referred to as the “positive report” allows credit reporting agencies to hold and acquire positive credit information about customers’ credit histories. CCR not only offers borrowers the opportunity to rehabilitate bad credit scores or improve good ones; it also allows lenders to perform a more detailed assessment of potential borrowers. This can result in more personalized rates for borrowers that reflect their risk profile.
4. Evidence of continued transparency
In order to draw attention to their performance and distinguish themselves from traditional lending institutions, many P2P operators have voluntarily made their lending books accessible to the public.
This commitment to transparency means investors can review the organization’s borrowing requirements, leadership credentials, past financial performance, default rate, and also research commonly funded loan types (such as debt consolidation. or renewable energy loans). If you’re trying to choose a P2P lender to invest with, finding one that is committed to being open and transparent is a great way to start.
5. Positive customer reviews
Before choosing a P2P platform operator, it is also worth researching what former investors are saying about their experience with the company. How did the operator perform on a review website? Has he received any rewards for his worth or service? If you are considering investing through an online platform, it is important to make sure that you can access great customer service and helpful guides if you ever have any questions.
What are the biggest risks associated with P2P investing?
The biggest risk for P2P investors is that the borrower will default or repay the loan late. If a loan cannot be repaid by the borrower, you may be limited by how much you can get back from your investment, depending on the type of loan. There is also the interest rate risk to consider, which is the same with any fixed-term loan – there could be a risk of interest rates rising before the end of the term, which means you won’t. cannot transfer your investment to a higher interest loan.
Keep in mind that investing in P2P loans is not for everyone. Before you dive in, be sure to research what it involves.
Daniel Foggo is the CEO of peer-to-peer lender Plenti. He holds a bachelor’s degree in commerce (with distinction) and a master’s degree in economics and finance. Daniel was named FinTech Leader of the Year at the 2016 Australian Fintech Awards and Fintech Entrepreneur of the Year at the 2017 Australian FinTech Business Awards.