An investor’s guide to peer-to-peer lending

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Since its introduction in Australia, peer-to-peer (P2P) lending has opened the established consumer credit asset class to investors who are looking to diversify their investment portfolio, whilst providing a more stable investment than shares.

This model of investment has proven to be an appealing option for both investors and borrowers. A survey conducted by the Australian Securities and Investments Commission (ASIC) showed that the sector is experiencing significant growth, with more than $300 million in P2P loans funded in 2016/171 almost double the $156 million recorded in 2015/16. RateSetter alone is now funding over $20m in loans each month.

So, what is P2P lending?

P2P lending businesses connect investors who are looking for attractive, stable returns with borrowers who are looking for a loan, without directly involving traditional intermediaries like banks. By leveraging technology and avoiding costs associated with maintaining a branch network, they’re able to offer better value to both the investor and the borrower.

How does P2P lending work?

While there are different marketplace models, the model offered by RateSetter works much like a stock exchange, with the best lending rate being the next to be matched to borrowers. To decide what rate to lend at, P2P platforms typically provide significant amounts of data to investors.

RateSetter offers various investment options from 1 month to 5 years in term. Rates ordinarily range from just under 4.0% p.a for investments in the 1-month rolling market to around 6.2% for 5 year income lending market investments that pay principal and interest back monthly. Creditworthy borrowers can obtain a loan for buying a car, consolidating debt, home renovation, study and a range of other approved purposes.

What are the opportunities for investors?

Through P2P lending, investors can enhance their investment portfolio’s risk-adjusted returns. More specially, the opportunities and attractions include:

  • Access to the world’s most established and largest asset class (loans): Previously the loan asset class was generally only accessible to the big banks, so the introduction of P2P lending levels the playing field for retail investors.
  • Attractive returns: The share market and property can deliver high returns, but P2P lending offers can offer competitive returns with lower volatility. RateSetter offers stable returns of up to around 8 per cent per annum, with fixed monthly payments from creditworthy Australian borrowers and the protection of the Provision Fund.
  • Protection against default loans: The credit risks of P2P lending can be managed. RateSetter lends only to creditworthy borrowers, (current loss rates are currently below those generally experienced by banks). Additionally, RateSetter’s Provision Fund has ensured no RateSetter investor has lost either principal or interest, as any credit losses have been covered by the Provision Fund.
  • Set your own rate: RateSetter’s P2P marketplace provides investors with high levels of transparency and control. Investors set rates they are willing to lend at and the lowest rate on offer is matched to the next borrower loan.
  • Efficiency: P2P lending platforms are designed to deliver more efficiencies and value to investors and borrowers. By combining an online platform and modern technology with a disruptive business model, operating costs and expenses can remain low, with the benefits passed on to customers.

What are the risks for investors?

It’s important that investors realise that P2P lending is not covered by the Government’s Financial Claims Scheme, like a bank account with a balance up to $250k is, so an investor’s capital investment is at risk. It’s, therefore, crucial to see how the P2P business manages credit risk.

In the case of RateSetter, a substantial buffer against credit losses is provided through the Provision Fund, a pool of cash available to compensate investors in the event of borrower late payment of default. The Provision Fund is not a guarantee, but it holds over $10m and has successfully ensured that no individual RateSetter investor has ever lost a cent of principal or interest since it commenced operations over 4 years ago in Australia.

For SMSFs and investors who don’t want their money sitting in low-yielding cash investments or volatile shares, and those looking to diversify their existing portfolio, the P2P lending sector could be an attractive new option that delivers significant benefits.

You can find out more about the investment opportunities that RateSetter offers here.

Data as at 29 May 2019.

1. Survey of marketplace lending providers: 2016-17, Australian Securities & Investments Commission

2. Morgan Stanley says peer-to-peer loans will soar to $22b in Australia by 2020, Sydney Morning Herald

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.