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Non-traditional lenders have become popular among borrowers needing personal loans and investors seeking higher returns on their money.

Peer To Peer lending is one such arrangement designed to accomplish this objective. If you are intrigued by P2P lending and want to know whether it is the right option, then this blog is for you.

Explore Peer-to-Peer lending in detail – how it works, how to qualify, what is risk in P2P investment, how to find the best P2P investing in Australia, and how to lend or apply for a loan using the service.

1. What Is Marketplace Lending?

Marketplace lending is an arrangement that enables retail or wholesale investors to invest money to meet the loan requests of borrowers, including businesses or consumers.

The online platform facilitates borrowers to place a loan request which is then matched against the loan offers by investors. In some arrangements, multiple investors may fund a single loan with a common objective of seeking returns on the lent capital.

2. What Is P2P Lending?

'Peer-to-peer lending' is one of the best examples of 'marketplace lending.' This lending platform link borrower with investors without involving the banks.

Borrowers must sign up on the platform to receive loans, and investors become lenders to receive a higher return than they typically obtain from other investments.

3. How Profitable Is P2P Lending?

P2P investing has pros and cons that you must understand before considering this service.

• Investors usually get comparatively higher returns with a good level of flexibility and choice. 

• It also benefits borrowers as they get loans at a more competitive rate and lower fees. 

• P2P lending helps borrowers avoid some of the requirements that traditional lenders or banks might place on them and get the loan approved faster than big banks.

• It helps investors diversify their risks by lending small amounts across a portfolio of loans.

• The process of investing in P2P sites is straightforward. You get the tools to manage your paperwork, credit records, and legal documentation and monitor loans in your portfolio.

• P2P lending gives you various options to suit your risk appetite and financial goals, such as secured and unsecured loans and varied repayment terms.

Let Us Look At What Are The Disadvantages of P2P:

• No investment option delivers high returns with a guarantee. If one claims so, know that they are deceiving you. P2P lending services offer higher returns to investors willing to take on a higher level of risk. You can benefit from this high-risk-high-reward service if you have surplus money you are okay with losing.

• Despite the advertised interest rate, there is no guarantee of a return on investment.

• You may lose money if the borrower defaults on payment or becomes bankrupt. Bank-based investment options may offer lower returns but come with an Australian government guarantee that protects your deposit up to $250,000 per person.

• Economic downturns could impact your returns in the future.

• Credit ratings the P2P operator assigns loans are inconsistent and may mislead. It is because operators do not follow any standard external rating agencies. 

• Investing in multiple loans of different duration makes it tough to foresee your returns.

4. Is Peer-To-Peer Lending Legal In Australia?

In Australia, peer-to-peer lending investment services must hold Australian financial services licenses. It shows that they are legally bound to lend responsibly and perform adequate security and safety checks on borrowers.

5. How Does P2P Investing Work?

P2P lenders offer various investment options with varying estimated interest rates, loan terms, and risk levels. You can find a loan offer/request ranging from a few weeks to many years.

P2P lenders charge you a platform fee and an application fee in return for the service. The platform fee varies from one lender to another and makes up the borrowers' loan costs.

As an investor, you can park money in single or multiple loans to yield desired returns. Borrowers who match the loan criteria receive the loan. You derive returns from loan repayments and the interest you charge on them.

Funding into a pool of loans (made up of money from several investors) helps in portfolio diversification and lessens the risk of borrower default. On the contrary, loaning bulk funds to a single loan or an individual borrower can get significant returns. Still, you can lose your capital if the borrower defaults on payment.

Though borrowers are shortlisted based on their financial stability and loan repayment ability, uncertainty on returns makes this a riskier option than guaranteed investment options.

6. Am I Eligible For A Peer To Peer Loan?

Can I invest in peer-to-peer lending? Yes. However, you must fulfil certain conditions to get a loan from a peer-to-peer lending service provider:

• Be at least 18 years. 

• Have Australian citizenship.

• Have a good credit rating, or you will incur higher interest. You need to provide documents that prove your creditworthiness and a steady source of income. 

For example, Plenti charges a variable rate of 7.39% p.a. to 8.59% p.a. on an unsecured personal loan for borrowers with excellent credit. For the same loan, you must pay a variable rate of 11.29% p.a. to 14.69% p.a. if you have a good credit rating.

7. How Do I Apply For Peer To Peer Investing?

Have you been exploring P2P lenders for the best lending opportunity and want to know how to become a peer-to-peer lender? Follow these steps:

• Step 1: Considering your expertise, consider investing in a personal loan, business loan, or both.

• Step 2: Do your due diligence, and focus only on borrowers with financial stability, good credit rating, and an intelligent business plan.

• Step 3: The plenti investing procedure is similar to investing in a share trading platform. Start by choosing an amount that you wish to lend. With Plenti, you can start lending with as little as $10. Transfer funds into your holding account using commonly used payment methods such as BPAY, a bank transfer, etc. Once you get the funds in your holding account, you are ready to lend.

• Step 4: Choose a loan market from the fixed-term markets with varying loan durations. It helps the platform operator match the lenders with borrowers in the marketplace.The lender dashboard enables you to reinvest payments on your loans at the market rate or a specified interest rate.

• Step 5: Specify the rate at which you want to lend money. Many P2P platforms provide lenders with features to help them make an informed decision while setting the rate. Some of these include 'last matched rates' for each market or the 'full market view' that shows offers by all lenders at varying rates and loan amounts. Evaluate critical data such as lender returns, rate history, borrower demand, available loan volume, projected borrower default rates, etc., that builds confidence between investors and borrowers before entering a deal.

• Step 6: You also need to pay a certain percentage of the interest you earn on the loans to the P2P lending service provider.

8. How To Apply For A Loan At P2P Lender?

Applying for a loan at peer-to-peer lending platforms is straightforward. You must carry out the below transactions through a specialized online platform:

• Complete an online application on the P-2-P lending platform along with supporting documents that show your regular income.  

• The platform evaluates the application and determines your creditworthiness and risks to lending you money. Based on the calculation, it assigns you an appropriate interest rate.

• After approval, you receive the available loan offers from the investors based on your credit rating and allocated interest rate.

• Evaluate the suggested loan offers and choose the one that suits your needs the most. 

• You must make regular interest payments and repay the principal at maturity.

• Pay a specific fee for availing of the service. Besides establishment fees, some lenders also charge monthly account-keeping fees, early repayment fees, and other fees. 

9. Is Peer To Peer lending (P2P) High Risk?

Here are the reasons that make a P-2-P lending arrangement riskier than other investment options:

• Credit Risk: The higher returns with P-2-P lending come with higher credit risk. The risk is visible at times of economic downturn when equities fall to their lowest level. In such scenarios, P-2-P lending investments appear as riskier than stock investments. They fail to offer the same diversification benefit as in a safe asset class, like government bonds, that perform well during economic turmoil.

• Defaults on Payment: Another significant risk involved while dealing with a P-2-P lending environment is default or late payment by the borrower. Not all, but some P2P borrowing sites offer a certain level of protection for investors in such an event.

• Asymmetric Interest Rates: Furthermore, you may face issues due to the asymmetric interest rates if the rate hike during the loan term. In this case, you can only move your invested capital to a higher-interest-bearing loan once its maturity. Though it doesn't lead to loss of money, it can deprive you of the gains you would have gotten by switching to a higher interest rate.

• Concentration Risk: Concentrating a large portion of the money on any single investment and not diversifying into a couple of loans is another risk if you fail to recover money from that loan for any reason.

• Tax Inefficiency: It is another reason that makes them an unattractive investment option. The returns you generate from the gains in P-2-P lending are 100% taxable, and there is no provision of discount on your capital gains as you get by holding shares for over a year.

• Cyber Security Risks: Credit assessment standards may lead to better management in the operation of the service. It, in turn, makes the investors and borrowers vulnerable to conflict of interest and cyber security risks.

• Risk Due To Improper Knowledge: During participation, inadequate understanding of the marketplace among investors and borrowers can lead to risks. Considering the above, it is, therefore, important for marketplace lending providers to ensure that participating entities are well-informed of all associated risks.

10. What Features Should I Look For In A P2P Loan?

Like any personal loan, you must look for the following features to make it work. Here are a few things you should watch out for:

• How Much Should You Invest in P2P?: Look at the operator's minimum investment, which usually ranges between $10 to $500,000, the investment term, the risk level, and the historical interest rate. Choose one with flexible terms that suits your needs:

• Interest Rate: Find out who computes the interest rate and what factors govern the loan's interest rate.

• Security: Find out how secure the platform is. Check the security status of the loan to determine whether it is unsecured or secured.

• Available Loan Options: Another important consideration is to choose whom you lend to or borrow from. Check whether the service allows you to spread your investment over multiple loans. It is essential as it helps lower the risk of losing your money.

• Additional Repayments Facility: Some P-2-P lending services offer the facility to make additional repayments on loans. It helps borrowers save money in the form of interest over time.

• Redraw Facility: The redraw feature is helpful when you need money urgently to pay off your unexpected bills or to fund any immediate need.

• Flexible Repayment Frequency: It is another helpful feature you must look for comparing Peer-To-Peer lending services. With this feature, you can set up 26 fortnightly payments instead of 12 monthly payments to close your loan faster.

• AFSL Licence: Before investing, verify that the P2P platform holds the AFSL license. Always read the product disclosure statement and Financial Services Guide before choosing the service.

• Ease Of Recovering Money: What if you change your mind and want to get your money back? Check whether the platform allows you to pull out your funds from it and how easily you can do it. Also, check how the platform protects lenders and helps them recover their money if the borrower defaults on payment. Besides the above, there can also be the possibility of the company failing. Under such a scenario, how can the lender recover his investment on the platform?

• Fees: Compare different P2P lenders based on the types and amount of fees they charge for using the platform for investments and repayments.

11. What Are Some Peer-To-Peer Lending Options For Investors?

Some of the most common peer-to-peer lenders in Australia are:

Bigstone

• Founded in 2014 and mainly into offering lending services for small- to medium-sized businesses throughout Australia. 

• Loan amounts range between $10,000 to $2 million. 

• The borrower can use the funds to buy equipment, office fit-outs, and other commercial purposes. 

• The minimum initial investment amount is $1,000.

• It takes as little as an hour to approve a loan if it is for $100,000 or less.

Harmoney

• Founded in 2014, it is the largest personal loan marketplace in Australasia. 

• It offers a range of unsecured personal loans from $2,000 to $50,000.

• The platform is 100 per cent managed online, which implies faster sign-ups and applications.

• The lending platform use borrower's data and a digitalized application process to assess their creditworthiness. 

• The borrower can use the finance for debt consolidation and other legal purposes.

• Interest rates are starting from as low as 5.35% (comparison rate 6.14% p.a)

• No early repayment fees

MoneyPlace

• It is a Melbourne-based consumer-focused P2P lender that offers competitive rates to creditworthy borrowers.

• Secure Funding Pty Ltd, part of the Liberty Group, funds loans. 

• The loan amount ranges from $5,000 and $50,000. 

• Users need not pay monthly fees to use the service.

• The fast and hassle-free application process takes only two minutes to complete

• Borrowers can apply for a fixed-rate unsecured loan of a maximum of $80,000 with a term of three-, five-, or seven years.

• Quick next-business day loan delivery, or even sooner

• Borrowers can use personal loans for various purposes, such as car purchases, holidays, debt consolidation, medical treatments, and home improvements. 

• The platform charges no monthly service fees to its users.

MarketLend

• Started in 2015, MarketLend is a peer-to-peer lender for small-medium-enterprise

• Borrowers can apply for a loan from $100,000 to $10 million based on their credit score and other factors.

• The lender takes a 'mezzanine' type of stake in each loan to reduce the lender's risk. 

• Borrowers can use the business loan to buy equipment and vehicles or to expand their business. 

• The lender doesn't invest in start-up businesses or borrowers with a default history.

Plenti (Earlier called Rate Setter)

• Originated in the UK in 2010, Plenti got established in Australia in 2014

• It became the first peer-to-peer lender to offer investment opportunities to everyday Aussies.

• Popular among self-managed super funds, Plenti has a track record of providing higher and more stable returns than high-interest savings accounts.

• It is the only ASIC-licensed P-2-P lender in Australia to accept retail investment, with no wholesale or institutional lenders on the platform. 

• It offers personal loans from $2,000 to $50,000 for six months to five years.

• Borrowers can use the funds to purchase a car, renovate a home, consolidate their debts, or pay for utilities. 

• Investors can start with as little as $10 and choose between an ethical investing fund, a provision fund, or a fixed-income fund.

• Users need to make interest payments every month. 

• It introduced the concept of a provision fund to safeguard lenders from borrower defaults on loans.

• The lender doesn't charge monthly or early repayment fees.

SocietyOne

• Founded in 2012, SocietyOne is the first P2P lender in Australia. 

• It is part of the ASX-listed MoneyMe Group.

• As opposed to traditional P-2-P lending platforms, SoceityOne connects wholesale investors with borrowers. 

• Borrowers can obtain loans from $5,000 to $50,000 with an unsecured loan and up to $70,000 with a secured loan repayable over two, three, or five years.

• Presently, the minimum investment amount is $100,000

• 90% of the platform's investors are self-managed super funds or individuals. 

• The platform charges a receivables management fee and a trust expenses charge.

• Establishment fees vary from 0% of the loan amount to a maximum of $595.

ThinCats

• ThinCats is a UK-based online P2P lending platform that laid its foundation in 2010

• It is an SME P2P lender that offers secured loans from $50,000 up to $300,000 for up to five years

• Monthly repayment options of principal and interest are available for investors. 

• There is no membership, loan repayment charges, or loan management fees.

• Loans are targeted for financing small to medium enterprises

• Currently, the lender offers an average interest rate of 12% p.a. 

(Past performance does not guarantee future results.)

Always seek the help of a professional financial advisor before making any investment decision. Investing carries risk. The above are just some general options for educational purposes. All these options come with risk. This is not financial advice.

12. Are P2P Better Than Stocks?

P2P lending and stock investment are two popular ways for investors to earn higher returns and grow their investments. However, there is also a higher risk involved. Choosing one from them requires extensive research and due diligence to determine the best option.

Here are some factors you can consider when deciding whether to invest in stocks or P2P lending:

• Risk Appetite: P2P lending is largely unregulated, posing higher risks for both borrowers. It may benefit investors as they get repayment at a higher rate from borrowers who cover lenders if they default in making payments. For this reason, P2P lending can benefit investors, provided that they carefully assess whom they lend to avoid losing money.

• Safety: Through P2P lending, you invest in an unsecured loan that offers a high-interest rate but carries a substantial risk of borrower's defaults on the repayments. Unlike P2P lending, the stock market is highly regulated and safeguards stockholders against fraud, loss, and other risks while using the platform. Stock trading is a better option for investors who value safety over risk. Selection of the right stocks will help them reduce risk and protect their investments.

• Fast Returns On Investment: P2P lending offers short-term money-making opportunities to investors. It implies that investors can get their money back quickly in just one to twelve months. Whereas in the case of stock investing, you need to stay invested for at least a year to gain decent returns. Also, in P2P lending, you at least know how much you will earn on your investments. You don't get such assurance when investing in stocks. Even if you stay invested for a couple of years, several factors influence your returns, such as market conditions, the global economy, etc., that affect them.

• Holdings: When you invest in stocks, you possess a part of the business. It is not the case in P2P lending, where you own a collection of debts.

13. What Are The Major Challenges Of P2P?

Despite of lucrative interest rates that P2P lending offers, this self-directed investment remains a tough sell due to regulatory, innovation, technology, and marketing challenges.

Learn more about the common P2P challenges that prevent many investors from investing in consumer loans.

• There are issues related to default, policy, and operational risks.

• Some P2P lending platforms have limited access to the credit history of their customers.

• P2P platforms don't assess the borrowers' trustworthiness and financial risks linked with loans. They don't assist lenders in making investment decisions. This way, lenders are prone to higher risks than when using conventional financial institutions.

• Financial regulators of some states don't allow peer-to-peer lending due to the highly risky nature of the investment.

• The minimum investment is high compared to other types of investments.

• You don't get as good returns as the stock market.

• Another non-incentive for Australian money managers is that Peer to Peer lending isn't cheaper to do. The yearly fee that P2P lenders charge is high compared to other investments throughout the country.

• Tax Inefficiency is another essential concern that makes investors reluctant to use this service.

14. Conclusion

P2P lending investment carries higher risks than other investment options. Borrowers must do all the checks and balances and compare all options to find a deal with the lowest rate. Only apply for a few loans, which could harm your credit score.

Investors should consider the risks associated with P2P lending. Assess the creditworthiness of the borrower (the person or business) before lending money.

Diversify your portfolio to mitigate risk when dealing in a risky P-2-P lending environment. Finally, check the fees, conduct your due diligence before signing up, and compare different options to enter the right deal for your need.

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