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Loans in Australia

Peer to Peer Lending Explained

By September 27, 2023October 19th, 2023No Comments
peer to peer lending

Disclaimer: This content does not constitute financial advice. The article below is for the readers’ information and education only. The writers at Friendly Finance are not financial advisors and are therefore not authorised to offer financial advice. Friendly Finance recommends our readers to always do their research and seek independent advice as needed.

History of Peer-to-Peer Lending

Peer-to-peer (P2P) lending, an innovative financial model, gained prominence in the early 2000s due to the growing accessibility of the Internet and increased trust in online transactions. This concept emerged as a disruptive force against traditional banking systems.

One notable milestone was the launch of Zopa in the UK in 2005, which formalised and popularised P2P lending in Europe. In the U.S., Prosper and LendingClub followed suit, starting operations shortly after. While specific platforms and timelines may vary, P2P lending gradually expanded globally, including in Australasia. Its success can be attributed to its ability to provide competitive interest rates, accessibility, and a user-friendly online experience.

Who Uses Peer-to-Peer Lending and How is it Done?

Peer-to-peer (P2P) typically involves individuals or investors lending money directly to borrowers through online platforms. To understand who uses P2P lending and how it works in Australia, we’ll explore the dynamics of linking investors with borrowers.

Linking Investors with Borrowers

In Australia, P2P lending platforms act as intermediaries between investors and borrowers. These platforms offer a range of services and earn commissions by charging fees to both parties. For investors, participating in P2P lending means purchasing a financial product, akin to a managed investment product. They can choose to fund a single borrower or invest in a portfolio of loans, often with the option to select the lowest available interest rate.

Borrowers, on the other hand, borrow money from individual investors, to repay it over an agreed-upon period. To ensure the suitability of borrowers, P2P platforms assess their creditworthiness, often by evaluating their credit rating. Notably, not all platforms disclose the lending risk of each borrower, and personal details are kept confidential.

One interesting aspect of the Australian P2P lending landscape is the availability of hybrid models, where lenders might not be directly matched with a single consumer but instead invest in a collection of consumer loans. This flexibility allows investors to diversify their investments.

Throughout the loan agreement, ongoing repayments from borrowers are collected by the P2P platform and subsequently deposited to the investors. Depending on the platform and the specific terms, an investor’s money can be returned as part of the repayments or at the end of the loan term.

Peer-to-Peer Lending Websites in Australia

In Australia, several Peer-to-Peer (P2P) lending websites offer unique features and services.

Investors are attracted to peer-to-peer (P2P) lending because it offers them diverse interest rates for potential investments. In P2P lending, individuals can directly lend money to other individuals, bypassing traditional banks. The interest rate charged by lenders in P2P lending is a percentage of the principal amount, and the returns earned come from the interest paid by borrowers.

On the other hand, borrowers are drawn to P2P lending networks because they often provide loans with lower interest rates compared to what traditional banks or personal loans might offer. However, it’s crucial to note that the interest rates can vary depending on the specific P2P lending platform. Borrowers should conduct thorough research to understand terms and interest rate offerings. This due diligence is essential to make informed borrowing decisions and ensure the most favourable terms for their loans.

SocietyOne

SocietyOne was the first P2P lending platform in Australia. It connects borrowers with individual investors, providing personal loans. Notable highlights include its pioneering role in the Australian P2P lending sector and its focus on providing competitive personal loan rates.

Society One’s loans have annual percentage rates (APRs) that span from 9.20% to 25.99%. There are no fees associated with this loan, such as an establishment fee or an early repayment fee. SocietyOne offers personal loans with terms of 2, 3, and 5 years. Source: https://societyone.com.au/marketplace/rates-and-fees

*Rates above are accurate based on the information on SocietyOne website as of Aug. 2023

Wisr

Wisr is known for its user-friendly P2P lending platform, primarily offering personal loans for debt consolidation and other financial needs. It emphasises responsible lending practices and financial well-being, providing borrowers with a transparent and convenient lending experience.

The interest rates for Wisr loans range from 9.84% to 19.45% p.a., and the comparison rates range from 10.69% to 20.38% p.a. The loan amount is between $5,000 and $64,000, and the terms are 3, 5, or 7 years. There is a one-off establishment fee of $595 for all Wisr loans. There are no ongoing or early repayment fees. Source: http://friendlyfinance.com.au/lender-reviews/wisr-reviews/

*Rates above are accurate based on the information on Wisr website as of Aug. 2023

MoneyPlace

MoneyPlace stands out with its user-friendly platform and personalised loan rates. It connects borrowers with individual investors and offers an alternative to traditional banks for personal loans. MoneyPlace is recognised for its customer-centric approach.

Money Place customises its interest rates to align with its borrowers’ specific needs. Their unsecured loan rates start at 8.74% p.a. and go up to a maximum of 19.99% p.a. They offer loans that range from $5,000 to $80,000 and come with term options of 3, 5, or 7 years. Source: https://moneyplace.com.au/

*Rates above are accurate based on the information on MoneyPlace website as of Aug. 2023

Plenti

Plenti provides a range of lending options, including personal, automotive, and renewable energy loans. It is recognised for its transparency and competitive interest rates. Plenti offers borrowers a variety of loan options and attractive rates.

Plenti offers personal loans with interest rates starting at 6.57% p.a. and repayment terms ranging from 12 months to 7 years. There are no upfront fees for early repayment or making extra repayments. You can make extra payments at any time without incurring fees or penalties. These payments will reduce the loan term and overall interest paid.

However, Plenti may charge a late payment fee of $30 if you fall behind on your repayments. Source: http://friendlyfinance.com.au/lender-reviews/plenti-reviews/

*Rates above are accurate based on the information on Plenti website as of Aug. 2023

OurMoneyMarket

OurMoneyMarket is another P2P lending platform in Australia, focusing on personal loans. It provides borrowers with access to funds for various purposes and offers competitive interest rates.

Our Money Market offers personal loans with interest rates starting from 6.57% p.a. and comparison rates starting from 7.19% p.a. The actual interest rate and comparison rate you are offered will depend on your credit score. There is only a one-off establishment fee that is added to your loan proceeds. The amount of the establishment fee is based on your loan grade and is calculated as a percentage of your loan amount. This can range from 1.50% to 6.0% of your loan amount and is subject to a minimum of $250.

Some non-standard fees may apply, such as a loan variation fee, document production fee, and loan cancellation fee. There’s also a late payment fee of $35 and a dishonour fee of $25. If you breach any of the terms of your loan contract, you may be charged enforcement expenses. Source: https://ourmoneymarket.com/

*Rates above are accurate based on the information on Our Money Market website as of Aug. 2023

How does peer-to-peer lending differ from online lenders?

Peer-to-peer lending differs from traditional online lenders in several key ways:

  • Direct Connection: P2P lending platforms directly connect individual investors with borrowers, whereas online lenders are typically financial institutions that lend their funds.
  • Diverse Funding Sources: P2P lending pools funds from multiple individual investors, offering borrowers access to a diverse range of potential lenders. Online lenders rely solely on their own capital or institutional funding.
  • Interest Rates: P2P lending often allows borrowers to access competitive interest rates determined by the market and investor appetite. Traditional online lenders may offer fixed rates based on their cost structures.
  • Flexible Terms: P2P lending platforms often provide more flexible loan terms, as borrowers can negotiate directly with individual lenders. Online lenders typically offer standardised loan terms.
  • Risk Assessment: P2P lenders often use innovative risk assessment models, including alternative data sources, to evaluate borrower creditworthiness. Traditional online lenders rely on more conventional credit scoring methods.
  • Investment Opportunities: P2P lending allows individual investors to diversify their portfolios by investing in loans, potentially earning interest. Traditional online lenders do not offer such investment opportunities.

Things to Consider in Peer-to-Peer Lending

Peer-to-peer platforms are formed as managed investment schemes. This means the platform must possess an Australian Financial Service Licence (AFSL), which allows it to run the scheme and comply with the national regulator ASIC. The platform should have the details of the system of registration and ASFL on its website and the details of its Australian Credit Licence (ACL).

For Investors:

Investors in Australia should consider the following factors:

  • Risk Tolerance: Assess your risk tolerance. Peer-to-peer lending inherently carries risk, including the risk of borrower defaults. Investors should be comfortable with the level of risk associated with their investments.
  • Diversification: Diversify your investments across multiple loans. Spreading your investments can reduce the impact of defaults on your overall portfolio.
  • Platform Selection: Carefully select a reputable peer-to-peer lending platform. Investigate the platform’s track record, lending practices, and transparency. Look for platforms that align with your investment goals.
  • Loan Analysis: Evaluate loan opportunities carefully. Review borrower profiles, loan terms, and risk assessments provided by the platform. Make informed decisions based on your research.
  • Interest Rates: Compare interest rates offered by different loans and platforms. Higher interest rates may provide higher returns but often come with increased risk. Balance potential returns with risk tolerance.
  • Loan Terms: Understand the loan terms, including repayment schedules and fees. Ensure they align with your investment strategy and goals.
  • Legal and Tax Implications: Be aware of the legal and tax implications of peer-to-peer lending income. Consult with financial advisors or tax professionals for guidance.

For Borrowers:

Borrowers in Australia should take the following into account:

  • Creditworthiness: Assess your creditworthiness. Your credit history affects the interest rate you can secure. Maintain a good credit profile to access competitive rates.
  • Loan Purpose: Clearly define the purpose of the loan. Different lenders may offer specialised loans for specific purposes such as debt consolidation, home improvement, or personal expenses.
  • Interest Rates: Shop around for competitive interest rates. Different peer-to-peer lending platforms and lenders may offer varying rates. Compare offers to secure the best deal.
  • Loan Amount: Borrow only what you need. Avoid overborrowing, as it can lead to financial strain and higher interest costs.
  • Repayment Ability: Assess your ability to make timely loan repayments. Ensure that the loan fits within your budget and won’t strain your finances.
  • Platform Selection: Choose a reputable peer-to-peer lending platform that suits your borrowing needs. Research platform fees, terms, and customer reviews.
  • Loan Terms: Read and understand the loan terms and conditions, including repayment schedules, fees, and penalties. Ensure they align with your financial goals.
  • Legal and Tax Implications: Be aware of the legal and tax implications of peer-to-peer loans. Seek professional advice to understand the potential impact on your financial situation.

Both investors and borrowers should conduct thorough research and due diligence, considering their unique financial circumstances and goals.

The Risks of Peer-to-Peer Lending

Peer-to-peer lending in Australia presents both investors and borrowers with certain risks. Here’s what both parties should consider:

For Investors:

Investors in peer-to-peer lending should be aware of the following risks:

  • Default Risk: Investors are at risk of losing some or all of their invested money if borrowers fail to repay their loans. Unlike traditional banks, peer-to-peer lending platforms do not lend their own money; instead, the risk is transferred to investors.
  • High Returns vs. Risk: While peer-to-peer lending can offer comparatively high returns, these returns come with a corresponding level of risk. Investors should carefully assess their risk tolerance and balance potential returns with the risk of capital loss.
  • Credit Assessment: Peer-to-peer platforms typically assess borrowers’ creditworthiness and assign risk grades. However, these assessments are based on current data risk assessments and may not be directly linked to data used by credit bureaus. Investors should be cautious and conduct their due diligence.
  • No Guarantees: Even if investors opt for low-risk loans, there are no guarantees of getting their money back. Like any investment, peer-to-peer lending carries inherent uncertainties.

For Borrowers:

Borrowers should also consider several factors when engaging in peer-to-peer lending:

  • Interest Rates: While peer-to-peer lending can offer competitive interest rates, borrowers should compare rates available in the market and shop around to find the best deal that suits their financial needs.
  • Loan Purpose: Clearly define the purpose of the loan. Different lenders may offer specialised loans for various purposes, such as debt consolidation or personal expenses.
  • Repayment Ability: Assess your ability to make timely loan repayments. Ensure the loan fits within your budget and won’t strain your finances.
  • Platform Selection: Choose a reputable peer-to-peer lending platform that aligns with your borrowing needs. Carefully read and understand the terms and conditions of the agreement before signing up.
  • Legal and Tax Implications: Be aware of the legal and tax implications of peer-to-peer loans. Seek professional advice to understand the potential impact on your financial situation.

Conclusion

Peer-to-peer (P2P) lending serves as a mutually beneficial financial model where investors and borrowers come together outside of traditional banking institutions. Investors are enticed by the variety of interest rates available for their investments, while borrowers may find lower interest rates compared to conventional bank loans. However, thorough research into different P2P lending platforms is crucial for both parties to navigate this lending network effectively. This ensures that investors make informed investment choices and borrowers secure the best possible loan terms, making P2P lending an attractive and viable alternative in the financial landscape.