P2P Lending: Risk versus Reward
Peer-to-peer lending (P2P) allows everyday Australians to take advantage of investing in consumer loans, a well-established asset class that was previously the exclusive domain of banks and institutional investors.
P2P lending takes place via an online marketplace that uses technology to match borrowers who seek a competitive loan with investors who seek competitive returns.
To everyday investors (including SMSFs), P2P lending is delivering a new source of attractive returns, with regular payments from borrowers. To borrowers, P2P lending provides an attractive alternative to traditional financial products, with lower rates and simpler, easier customer experience. By reducing inefficiency, P2P lenders can offer better value to everyone.
If you’re thinking about investing in a P2P lending platform, or have already invested, it’s important to understand the relationship between risk and reward. RateSetter is Australia’s largest P2P lender, with over 14,000 registered Australian investors, including an increasing number of SMSFs. Here we look at how RateSetter manages risk and reward to provide investors with an attractive and stable investment opportunity.
RateSetter is committed to ensuring that investment risk is managed carefully, not only during benign economic periods, such as we are experiencing now but also in tougher economic climates. This starts with carefully screening loan applicants to minimise borrower credit risk. We have a large underwriting team that uses both innovative technologies and traditional resources (such as credit bureau information) to analyse data and assess each applicant’s credit risk. Their primary objective, of course, is to lend only to creditworthy borrowers, and ensure that when they do approve a loan applicant, any risks are appropriately priced.
Loss protection – the RateSetter Provision Fund
RateSetter offers a unique additional buffer to help manage risk: the Provision Fund. RateSetter’s Provision Fund is a pool of cash available to compensate investors in the event of borrower late payments or defaults. While the Provision Fund doesn’t provide a guarantee, it currently represents over $12 million, representing 160% coverage of RateSetter’s anticipated loss rate. We’re very proud of the fact that, to date, the Provision Fund has ensured that no RateSetter investor has ever lost a single cent.
Choice and control
One of the best things about P2P lending is the control it gives investors over the amount they lend, the rate at which they lend, and the loan term. With RateSetter, investors decide which market they wish to invest in (from one month to five years) and then select the rate at which they wish to lend. The platform then matches their funds to corresponding loan orders, much like a sell order is matched on a stock market.
As experts in consumer credit risk, RateSetter considers risk assessment to be our responsibility. Our team of experienced professionals protects lenders from undue risk by rigorously assessing each borrower applicant. That means we choose who to lend to, simplifying the process for investors.
At RateSetter, transparency is paramount. On our website, investors can access data related to every loan RateSetter has funded through the RateSetter Lending Platform since its launch in 2014, as well as a host of supplementary information, such as the credit performance of loans funded each year.
Every investment entails a degree of risk. At RateSetter, we’re committed to ensuring that our investors understand the risks associated with their investments, and, importantly, that we can mitigate these risks to offer investors attractive returns on an ongoing basis.
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This information does not constitute financial advice and you should consider whether it is appropriate to your circumstances before you act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.