What is peer-to-peer lending?
Lending some cash to a friend or family member is an example of peer-to-peer lending at its most basic. And the P2P lending industry has grown off of that concept. With peer-to-peer lending, everyday Kiwis can elect to lend cash to other Kiwis (borrowers), who , in turn, pay them back with interest.
It’s a way for lenders to get good returns on their savings, and for borrowers to obtain loans, without the need for banks. It can be particularly beneficial for a borrower who falls outside of the banks’ standard lending criteria. Or, if their credit history makes getting a competitive rate difficult.
How does it work?
Peer-to-peer lending is done through an intermediary service. Typically it’s a website that matches potential borrowers and lenders, and manages the administration, repayments and any defaults.
Borrowers list their requests on the peer-to-peer lending website for potential lenders to accept. Typically, they need to provide details of how much they wish to borrow, for how long, and what the loan is intended for.
They then wait for a lender to accept their request and grant the funds. How long this takes depends on a variety of factors, such as how desirable the request is perceived, and how many lenders are available.
If the website has far more borrowers than lenders, for example, it could take time for a loan request to be accepted.
How it works depends on whether a lender is actively or passively investing.
If actively lending, a lender browses loan requests and selects which borrower they want to lend to. They are able to see details of what the loan is for, the term of the loan and how much interest they’ll receive.
If passively lending, a lender nominates how much money they are willing to lend, and the P2P service provider invests the sum into different loans on their behalf.
Rules of peer-to-peer lending for borrowers
The Financial Markets Authority (FMA) sets out rules for borrowers under the peer-to-peer lending business model:
- They must be honest about the information they provide: how they will use the money and their ability to pay it back
- They can borrow a maximum of $2 million in a 12-month period, although most services are for much smaller loans
Rules of lending for peer-to-peer providers
The FMA regulates peer-to-peer lending under the Financial Markets Conduct Act 2013. Under the regulations, peer-to-peer lending platforms must:
- Be licensed to provide services
- Only provide a platform for loans for personal, charitable, or small business purposes
- Comply with the Fair Dealing obligations in the FMC Act
- Have a written client agreement with lenders
- Give disclosure statements to retail lenders
- Meet reporting obligations
What are the benefits and what are the risks?
There aren’t any huge risks for borrowers in peer-to-peer lending. But there can be plenty of benefits. Interest rates are often lower than those offered by traditional lenders. So it can be a great way to borrow money cheaply. And P2P lending can help secure loans that fall outside of the big banks’ lending criteria. Plus, there usually aren’t any early repayments fees or costs. So you can cut the loan short at any time.
However, while P2P doesn’t pose a unique risk, the risks of borrowing in general still exist. Obtaining a loan means taking on debt. And, depending on your financial situation, it could lead to you getting in over your head. If you struggle to meet repayments, it could add more financial pressure and negatively impact your credit score.
→Related article: Things to Consider Before Getting a Personal Loan
The main benefit of P2P lending, from an investor’s perspective, is that P2P lending is just that, an investment, offering better returns than savings accounts and term deposits. Currently, savings accounts are offering minute interest rates, and even the average two-year term deposit on Canstar’s database is just 2.48% p.a.
However, if you invest your P2P funds with Squirrel, you can earn upwards of 6% p.a. While the Lending Crowd has investment options ranging from 5.03% p.a. to a whopping 20.26% p.a. depending on the risk profile of the loan. Do keep in mind, fees and taxes apply, meaning your actual returns will be lower.
As with all investments, P2P lending comes with inherent risks. For example, because a borrower has the freedom to repay a loan early at no charge, the lender might not receive the full returns they were expecting.
Worse, if a borrower defaults on their loan, the lender risks losing their money. It’s also important to consider that you typically can’t withdraw your investment. If you agree to lend on a two-year term, then you’ll not get your money back until the loan term is up, or the borrower repays it in full.
Also, after transferring funds into your P2P account, you need to wait for borrowers to request loans. Depending on how long it takes to gain loans for all your funds, you could have a large amount of money sitting in your account, accumulating no interest.
However P2P lending still has the potential for strong returns, and could be a useful addition to your investment toolbelt. One that can sit alongside shares, KiwiSaver, or even cryptocurrency to help diversify your investments.
→Related article: How to Pick Your KiwiSaver Fund
Your options for peer-to-peer lending
These are the licensed financial institutions currently offering P2P lending in NZ:
Crowdsphere is a crowdfunding platform that links long-term angel investors with business start-ups and entrepreneurs looking to raise capital.
At Lending Crowd borrowers have the option of two-, three- and five-year terms. They can borrow between $2000 and $50,000 unsecured, and from $5050 to $200,000 secured, in increments of $50. Rates and term options are based on a borrower’s application details.
Investors must make a minimum initial deposit of $50. Lending Crowd encourages investors to diversify their risk by investing in multiple loans at once. There are nine investment grades in both secured and unsecured loan classes (a total of 18 grades). This allows you to invest according to your own risk appetite and goals.
PledgeMe is a crowdfunding platform designed to link companies and organisations with investors. PledgeMe 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 individuals who want to raise money to make a plan happen.
Equity Campaigns are for companies that want to use crowd investment to grow, in return for equity in the business.
Lending Campaigns are for companies or organisations that want to borrow money to expand.
Southern Cross Partners
Southern Cross Partners has a long history of managing short-term mortgage loans, and matching these loans with investors. They use a credit-based system of investing.
Southern Cross Partners’ credit team assesses a loan application and uses its own funds to initially fund the loan. Investors can then choose to take on all or part of an individual loan – the minimum investment amount starts around $10,000. Southern Cross Partners then manages the loan on behalf of the investor.
People who want to borrow money apply online through the Squirrel Money’s website. If approved for a loan, they are then matched with funds from people who want to invest.
Investors can put their money (min:$500 to max: $2m) into three investment classes: home loans, personal loans or business property loans. Within each investment class there are seven risk categories, from 1 (very low risk and low returns) to 7 (high risk and higher returns).
Investors choose which investment class and interest rate they want to put their money into, and Squirrel’s platform matches them with an appropriate borrower.
Squirrel is unique in that it manages the risk of peer-to-peer lending by using a reserve fund. A pool of interest repayments from all loans, the fund aims to protect investors from borrowers who are late with their repayments, or who default.
Zagga specialises in secured loans. Borrowers can apply for loans between $25,000 and $2 million. Zagga then matches borrowers with lenders on its system, based on an investor’s profile.
Zagga’s loans are 100% secured, meaning the loan is secured against the borrower’s assets, most commonly against property or land. Zagga collects the borrower’s payments, takes a cut in the form of fees and then distributes the rest to the investor.
Need a loan? Shop around
Ultimately, the best way to ensure you get the most advantageous loan rate is to do your research, and to check out all the lenders in the market. Even if you’ve a poor D credit rating, there will still be range of loan options available. If you’re willing to shop around and compare lenders, you don’t have to pay sky-high fees and interest rates.
A great way to do this is to use Canstar’s free personal loan tool. It compares all the big banks and lenders across loan rates and fees in one easy-to-use tool. It also gives added information about Canstar’s expert research into the best loan providers and our prestigious Star Ratings and awards.
The table below displays some of the unsecured personal loan products available on Canstar’s database for a three-year loan of $10,000 in Auckland (some may have links to lenders’ websites). The products are sorted by Star Rating (highest to lowest) followed by company name (alphabetical). Use Canstar’s personal loan comparison selector to view a wider range of products on Canstar’s database. Canstar may earn a fee for referrals.
About the author of this page
This report was written by Canstar Content Producer, Andrew Broadley. Andrew is an experienced writer with a wide range of industry experience. Starting out, he cut his teeth working as a writer for print and online magazines, and he has worked in both journalism and editorial roles. His content has covered lifestyle and culture, marketing and, more recently, finance for Canstar.
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