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Peer to peer lending in Australia
With the Internet of Things, various P2P lenders can now nudge traditional lenders aside to gain recognition as better alternatives for Aussie borrowers. But how does peer to peer lending work, and is it safe to bypass the traditional banks in favour of this online option? Read our guide to find out more.
What’s peer to peer or P2P lending?
On one side of P2P lending, you’ll find savers and investors who need to grow their nest eggs. On the other side are borrowers who need extra cash to fix up their homes, buy cars, or pay back debts.
Then there are P2P websites that connect these borrowers and individual lenders directly. This online arrangement neatly cuts out traditional “middlemen” lenders and conveniently circumvents brick and mortar costs. As a result, borrowers have access to an affordable loan pot while investors get to rake in higher returns than what’s offered by mainstream banks.
How does peer to peer lending work for borrowers?
Are you a borrower who’s about to step up to a P2P platform and dip into a stranger’s pockets? Here are a few details of peer to peer loans you should be aware of:
- Loan amounts. Minimum amounts typically start around $1,000 while maximum amounts hover around $50, 000. However, some peer to peer lenders might offer more than this.
- Loan terms. Similar to mainstream lenders, repayment times generally range from one to five years.
- Risk-based interest rates. Your interest rate is personalised according to your credit history and financial situation. Therefore, best buy rates are generally reserved for excellent credit scores and pricier rates for those with subpar credit ratings. Interest rates on P2P loans can also be fixed or variable.
- Secured or unsecured loans. A big chunk of P2P loans is unsecured. But you’ll bump into secured personal loans where your property or goods back up any funds you borrow.
- Funding from several investors. Although it’s been said that P2P companies match up borrowers and lenders, you won’t be dealing with the lender directly. Instead, the P2P company stockpiles a pool of funds from various lenders. Therefore, your loan ends up being a contribution from not just one but a bunch of investors.
- Repayments. Loan repayments are generally collected via debit order. The P2P company takes a cut from the interest rate and fees you pay then pass the rest on to your investors.
Pros of P2P borrowing
- Better deals. P2P companies don’t have many overhead bills or operating costs to pass on to you. Therefore, you’ll likely bag a cheaper personal loan with a low rate that’s foreign to most traditional banks.
- Faster deals. Internet applications are generally quicker and more convenient.
- Relatively safe alternative to banks. P2P lenders are establishing themselves as viable alternatives when banks or traditional lenders are reluctant to lend.
Cons of P2P borrowing
- Lower borrowing limits. For contrast, some banks have maximum limits upwards of $100,000 while a P2P loan generally maxes out between $35,000 and $50,000.
How to compare peer to peer loans
With the mini-explosion of Australian P2P players that’s been happening since 2012, it can be challenging to find the best P2P loan option. If you’re weighing your options on the P2P lending scene, these three actions can help you find the right loan for your budget and needs:
- Check the rates and fees. You can expect P2P personal loan rates to be competitive, but watch out for fees that might overpower your budget. The company usually deducts an application fee from your borrowed funds. They may also charge a monthly fee. For a quick inventory of the loan’s total cost, inspect the comparison rate, which has the interest rate and fees and charges wrapped into its percentage figure.
- Choose flexible options. Choosing a flexible personal loan sets you up for a smoother repayment process. The first thing you need to screen for is the extra repayment feature. It allows you to sneak in additional repayments which cut down on your loan term and total costs. For best results, make sure this feature also comes with no early repayment fees. Also, consider if you’ll need a redraw facility. It enables you to tap back into the extra repayments you’ve made when you need extra cash again. Other features to prioritise include repayments that match your time table or schedule and a repayment amount that’s not too extra for your budget.
- Look into the company’s reputation. P2P lenders are not created equal, and some might not have a good reputation. Start by checking for a creditor’s licence then move on to reviews from customers who have dealt with that particular platform. It’s always best to line up as many financial products as possible to ensure you’re getting the best deal on the market.
How does peer to peer lending work for investors?
Investors can put money into P2P platforms to get decent returns. If you’ve got excess cash to bury into an online marketplace here are a few details to get you familiar with the process:
- Requirements. Depending on the platform, investors can be regular Aussies or have in-depth investment know-how and experience. Investors can also be institutions, companies, trusts, and self-managed super funds (SMSFs).
- Application review. Once you open an account, you can deposit enough cash to cover the minimum investment and then go through available borrowers’ profiles. You get to decide which borrowers to lend to, how much, and for how long plus the type of loan you’d like your money to fall under.
- Spread investments. The P2P company will distribute your investment across many borrowers to lower the risk of bad debt. You won’t be able to identify or communicate with the borrowers since the peer to peer company takes care of all the underwriting. The company is also responsible for collecting repayments on your behalf.
- Higher risks, higher returns. Borrowers are graded according to risk ratings. The more risky a borrower is, the higher the rate and the more you cash out. However, only the P2P company gets to set interest rates. Generally, it’s the norm to have your investments spread over accounts with different risk categories.
- Fees and charges. Fees structure for P2P investments may include monthly or annual fees, interest margin fees, and a risk assurance charge. Although this is not collected on the platform, you’ll also need to deduct tax from your returns.
Is peer to peer lending a regulated market?
While P2P lending offers attractive rates to investors and borrowers, it’s still riskier than traditional deals. The investments you make have no government guarantee to back them. That means if your savings get swallowed up and disappear, you won’t get the up-to $250 000 deposit protection that you’d typically get from banks and other Authorised Deposit-taking Institutions (ADI).
However, there’s some form of protection from ASIC regulations. Additionally, most P2P platforms have strict measures in place and safety nets to absorb losses from bad debt.
Pros of P2P lending for investors
- More profitable returns than other investment opportunities
- It can be a great way to diversify your portfolio
- Risk of loss is minimal when you spread your investment over scores of borrower accounts
Cons and risks of P2P lending for investors
- The Government Backed Guarantee on deposits does not apply to P2P platforms
- The headline rate might not be what’s on the ground when you factor in fees and unexpected losses
Where can you find peer to peer loans in Australia?
Popular P2P players in Australia include:
Peer to peer lending FAQ
How do I use a P2P loan?
Types of P2P loans include medical loans, business loans, student loans, plus more.
Do I qualify for P2P lending?
Lending criteria differ by provider, but the basics include having Australian citizenship and a stable income.
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