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Peer to peer (P2P) lending platforms help to link everyday borrowers with investors without getting the banks involved. While borrowers sign up to receive loans, investors become lenders in order to receive a higher return than what they'd normally get from savings accounts, term deposits and other investments.
Here are some of the main benefits of P2P investing:
Searching for a P2P loan instead? Read our comprehensive P2P lending guide.
Disclaimer: Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
As an investor, your money forms part of a loan which is offered to borrowers, and your returns come from loan repayments plus the interest charged. A single loan is typically made up of money from many investors to help diversify portfolios and reduce the risk of borrower default.
Conversely, some P2P lenders let you loan out larger amounts to an individual borrower or put up the entire amount for a single loan if you think you can get a larger return on investment that way.
P2P lenders usually offer a number of different investment options, with various estimated interest rates, risk levels and loan terms from a few weeks to several years. You may also have the option of investing in different types of loans, and understanding them is an important part of P2P investing.
While borrowers are required to be pre-screened for financial stability and loan repayment ability, the possibility that you will either get no return or even lose money makes this a riskier option than keeping your money in a term deposit or savings account.
There are a variety of peer to peer investment sites to choose from, offering a diverse range of features for investors. You'll want to take note of the operator's minimum investment, which can range from $10 to $500,000, the historical interest rate, investment term and the risk level. You can pick one with benefits that suits your needs.
This is one of the biggest risks posed to investors. If a borrower doesn’t repay their loan, it means the investing lenders’ capital is at risk. If a loan cannot be repaid, the amount you may be able to recover depends on the type of loan. Some P2P borrowing sites may offer certain protections for investors in the event of this occurring.
As with any fixed term loan or bank term deposit, there's some risk of interest rates rising before the term finishes, which means you can't move your capital into a higher-interest-bearing loan until its maturity. While this is not necessarily a risk to your capital and interest, it’s an issue that you should consider before committing your funds.
It's important to remember that although peer to peer operators are required to follow certain rules to better protect customers, there's never a guarantee that your money is safe.
At a minimal level, peer to peer operators in Australia are required by ASIC to conduct background checks on all borrowers before offering them a loan. This may include checking bank statements and government verification services.
However, some operators, such as RateSetter, have additional securities in places, such as a protection fund which is used to compensate investors. In the case of RateSetter, part of the interest charged to borrowers is transferred to its Provision Fund, while riskier borrowers will pay a higher fee which also goes into the fund. If borrowers default, investors will be compensated for all or some of their losses. Of course, an investor could still lose money in the case of heavy losses, but the impact will be minimised.
Prior to investing, you need to check with the Australian Securities & Investments Commission (ASIC) to see if the P2P platform holds an AFSL.
Know what you are investing in, and read the product disclosure statement (PDS) and Financial Services Guide (FSG) first where relevant. Look for information about:
Like all providers that offer consumer loans, P2P platforms must lend responsibly to ensure the investor doesn't lose money. As an investor, you should conduct your due diligence before signing up and compare different options to find the right one for your needs.
If you want to be more discerning, you can even focus specifically on borrowers you believe have a smart business plan and a bright future, and invest similarly to how you would with a share trading account.
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