Debbie Shankar - 24 Sep, 2015

Peer-to-Peer Investment is Set to Change the Face of Lending

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Many financial experts are predicting that Australia’s new, but quickly growing, peer-to-peer lending market is going to take off. This is attributed to the fact that 1000’s of borrowers and investors are queuing to be a part of the action.

It is anticipated that younger investors will be the first to embrace Peer-to-peer (P2P) lending say financial experts. This is due to these borrowers being more mobile than older investors, and they don’t have the same degree of brand loyalty.

Over time, however, older investors are expected to embrace P2P lending, especially those with self-managed super funds. P2P loans are expected to become part of a diversified portfolio.

What is Peer-to-Peer Lending?

P2P lending is a simple personal loan concept. Instead of a bank lending you money to finance your purchase, a non-banking organisation acts as the mediator between an investor wanting to make a return and a prospective borrower seeking to take out a personal loan.

In this respect, the ‘peers’ involved in P2P lending are the investor and the prospective borrower. The mediator is a web-based P2P platform. There are two P2P platforms in Australia at present, SocietyOne and RateSetter, with a third MoneyPlace, shortly set to make its debut in the Australian market.

How Does P2P Lending Work?

A P2P lending platform acts as a mediator between the investor and the borrower. The P2P lending platform earns a commission from the investor and borrower. The amount paid by the investor to P2P lending platform is far less than the return the investor makes on their investment, which comes from the loan repayments made by the borrower.

What are the Risks Associated with Peer-to-Peer Lending?

As with any form of investment, there are risks. The two main problems with P2P investment is that the P2P lending platform may go bankrupt or the borrower may default on their loan repayments. However, in saying this, RateSetter offers investors protection against repayment of loans by way of a Provision Fund.

The RateSetter Provision Fund currently holds more than $500,000 to cover loan repayment default. This fund is contributed to by the borrower who pays Risk Assurance Cover at the time of taking out their loan.

The amount of Risk Assurance Cover a borrower is charged depends on their credit history and rating. Basically the lower a borrower’s credit rating is, the more they will have to pay in Risk Assurance Cover.

The RateSetter Provision Fund is managed by a trustee, and RateSetter have no claim on the funds preserved in this account. The funds held in this account can only be used to cover loan repayment defaults.

In the event a claim is made for the recovery of lost revenue, due to loan repayment default by a borrower, then RateSetter will opt to use debt recovery measures before the Provision Fund is used. The Provision Fund is therefore used as a last resort, and investors who make a claim may receive full or partial compensation, depending on the nature of their claim.

RateSetter is the first P2P lending platform to offer this type of cover. However, the company remind investors that this is not an insurance cover.

What are the Benefits of Peer-to-Peer Lending?

Depending on your credit history, a P2P lending platform may be able to offer you a much better interest rate than a bank, building society or credit union. This is attributed to the fact that a P2P lender can often match your interest rate with your credit history, whereas banks have less flexibility.

So while a borrower with a bad credit rating may have a higher interest rate than a borrower with a high credit rating, they are still able to get a loan. A bank, however, is likely to decline the application of a borrower with a poor credit score.

Is P2P Lending Encountering Any Problems?

The greatest difficulty that P2P lending is encountering is obtaining the full credit history of a borrower. This is because in Australia it is difficult to obtain in-depth borrower information. The Comprehensive Credit Reporting (CCR) initiative, which launched in March 2014, aims to change this. The CCR strives to list positive and negative credit information, such as on time payments and late payments and defaults. Unfortunately without CCR a borrower’s credit report will only contain negative information.

Positive credit information has been shared in many other countries for a number of years, so Australia needs to catch-up. With this information, P2P lenders can offer borrowers with a positive credit score a lower interest rate.

Who Can Borrow Money from a P2P Lender?

P2P lending is for personal use and cannot be for another party or for a business. To apply, you must be 18 years-old, an Australian citizen or permanent resident, and you must earn $25,000 per year or more. In addition, you must have a good credit history that spans over a minimum of 2 years, and you cannot have been bankrupt.

How Much Can I Borrow From a P2P Lender?

A the moment, P2P lending in Australia can be used for personal unsecured loans for between $2001 to $35,000 in value. This makes them ideal for borrowers seeking to consolidate debt, buy a new car, do home renovations or go on a holiday. Loan terms are for between 12 and 60 months, and a once-off loan application fee applies to all loans.

How are P2P Platforms Growing?

Older investors are said to be joining RateSetter, who currently has over 1100 lenders listed and more than $54 million in funds available for borrowers. Some of these lenders are aged over 70 years-of-age.

The largest P2P lending platform, SocietyOne, began in 2012 and has funded over $200 million in loan applications since it started. This platform gains funds from wealthy wholesale investors, but the platform anticipates being able to open to retail investors in the future.

Want to know more about home loans? Then contact eChoice and find the right home loan for YOU today.

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