Should you invest in P2P lending?
Would you like to earn the high returns banks and other major lenders make from personal and other loans? Yes? Then look no further than peer-to-peer (P2P) lending, a form of fixed-interest investing relatively new to Australia.
"It's like having a term deposit on steroids," says entrepreneur and money management adviser Scott Parry. "Without too much risk you can get dream returns."
RateSetter, one of the big players operating here, says investors can earn more than 10%pa if they fund a five-year loan. SocietyOne, another big local participant, says it has produced average returns of 10.3% net for its investors since it launched in August 2012. Marketlend, a peer to business (P2B) lender, quotes net returns of 10%-14%.
In Australia, P2P lending is growing fast, with observers saying it has the potential to shake up the personal lending market in the same way that non-bank lenders disrupted the mortgage market in the 1990s. The sector is big business in the UK, where it kicked off in the mid-2000s, and also in the US.
Although sometimes called lenders, these businesses are more like brokers or introduction agencies, connecting investors looking for better returns than those of term deposits and online saving accounts with creditworthy borrowers seeking personal loans at competitive rates. Essentially they take the middleman (bank) out of lending, using innovative technology to reduce costs, improve credit analysis and speed up approvals.
Assess risk and reward
"Unlike traditional deposit accounts, money lent via a P2P platform isn't capital protected, so investors should ensure the return they're getting is sufficient to compensate for the risk," says Canstar's Justine Davies.
And it's not been smooth sailing for some early P2P lenders, such as iGrin. It began business in 2007 before being taken over by Paid International - which operates diverse finance businesses, including payday lending - in 2013. In January, Paid International entered voluntary administration, several months after it agreed to refund $1.1 million to customers who had been charged excessive loan fees.
P2P businesses are conscious of the need to build trust and keep out the "cowboys" and plan to establish a self-regulatory body to set standards, similar to one operating in the UK.
To date lenders boast very low default rates of around 1%-3%, which is similar to major lenders. Indeed RateSetter, which has set up a pool of cash funded by borrowers and held in trust for the benefit of investors to cover defaults, boasts that not one of its investors has lost a dollar of their capital since it started.
The industry also claims it has better processes to vet borrowers and price risk than traditional lenders.