What is peer to peer lending and how does it work?
When you invest via peer-to-peer lending, you’re earning interest by loaning your money directly to an individual, small business, community group or charity, rather than borrowing from a bank or financial institution. It is an unsecured loan. In 2015, LendMe announced it was the first peer to peer lender in New Zealand to specialise in secured lending, offering a range of loan products, secured by mortgage over the borrowers’ assets.
If a borrower has a shining credit rating, borrowers can actually get competitive rates. The concept is really an extension of a very basic loan strategy – loaning money to a friend or family member is an example of a small form of peer-to-peer lending. The borrower(s) may be unable to repay you, so you could lose your money or not get the interest you’ve been promised. Some providers offer ways to reduce this risk – such as spreading your loans across more borrowers or guaranteeing the repayments themselves. But this doesn’t eliminate the risk.
1. Squirrel Money
As Squirrel Money puts it, P2P lending is “like Tinder, but for money”. People looking to borrow money apply online through the P2P provider’s platform, and if approved for a loan, are matched up with funds from people who are looking to invest.
Squirrel Money uses a personal bidding system, where investors put in bids by stating the rate they want and how long they want to invest for. The bids are then matched against the secured and unsecured loans on Squirrel Money’s platform. It manages the risk of peer-to-peer lending by using a reserve fund that it calls, “Loan Shield”.
How this works is it takes part of each of the borrower interest payment and puts it into the Loan Shield to cover any unexpected credit losses. The amount that is put in this reserve, known as the “risk premium”, and it’s determined by the risk level of the borrower. If the borrower is low risk, then a relatively smaller amount is put into the reserve, compared to the amount of a borrower who has a higher risk profile. If a borrower defaults on a loan, the reserve fund covers the payment to investors, provided there is enough in the reserve.
2. Zagga (formerly Lendme)
Zagga, formerly LendMe, is New Zealand’s first peer-to-peer lending system to specialise in secured loans. Borrowers can apply for loans between $25,000 and $2 million. Zagga matches borrowers with lenders, based on ivestors’ profiles, which the investor has control over. Zagga’s loans are 100% secured, meaning the loan is secured against the borrower’s assets, most commonly against mortgages. Zagga collects the borrower’s payments, take a cut in the form of fees and then distributes the rest to the investor. Zagga, then-Lendme – received its peer to peer license in April 2015 and started trading in September of that year. Zagga manages lending to consumers and businesses.
3. Lending Crowd
Lending Crowd is a financial technology (fintech) company. Lending Crowd provides rate and term options after assessing the borrower’s individual application. Borrowers are always given the option of choosing between a 3 and a 5 year term and can borrow from $2000 up to $200,000, but must be in increments of $50. Investors must make a minimum initial deposit of $50. However, Lending Crowd encourages investors to diversify their risk by investing in multiple loans at once. Lending Crowd divides loans into four “investment grades”, the better your investment grade as a borrower, the better the rate you will get for your loan. Lending Crowd offers a fixed rate range from 6.69% p.a. to 18.96%. If you accept a loan, you’ll be charged a fee, added to the loan total per the Amount Borrowed and Platform Fee schedule.
PledgeMe is designed to help companies and organisations borrow from their “crowd” (investors) to help them work towards a goal. The campaigns work by offering loan notes in return for pledges. If the campaign meets its minimum target, then pledgers become lenders, who the company then repays over time at an interest rate the borrower has set. PledgeMe splits investing into three campaign types: Project Campaigns, Equity Campaigns and Lending Campaigns. Project Campaigns are for any individuals who need funds to make a plan happen, Equity Campaigns are for companies who are looking to expand via crowd investment and Lending Campaigns are for any company or organisation looking to expand by borrowing money.
5. Southern Cross Partners
Southern Cross Partners has a long history of managing short term mortgage loans, and has been successfully matching these loans with investors. They use a credit-based system of investing. Southern Cross Partners’ credit team assesses the loan application and uses its own funds to initially provide the loan. Investors can then choose to take on all or part of an individual loan – the minimum investment amount is $10,000. Southern Cross Partners then manages the loan on behalf of the investor.
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