P2P loans are debt based investment opportunities made available through P2P lending (also known as peer-to-peer, crowd or market place lending).
P2P lending involves matching people who have money to invest with people or businesses looking for a loan. Typically the investor will have the flexibility to choose things such as the rate of return required, the desired term of the investment or the actual loan itself.
There are a number of things that an investor interested in P2P lending should consider.
For borrowers, P2P lending provides an affordable lending alternative to typically more expensive banks that may also not provide the flexibility required, or may not cater for smaller borrowing amounts that are too small for a bank’s standard arrangements. For investors (lenders), P2P lending offers an alternative way to invest (in loans) with potentially higher returns than other fixed income investments.
Chris Andrews, La Trobe Financial’s Chief Investment Officer takes us through the process of peer-to-peer investing and explains the benefits of selecting the loans that best suit an investor’s risk and return appetite.
The whole process is facilitated by a P2P lending platform that connects investors and borrowers.
P2P lending (from a borrowers perspective) involves borrowing money without the need of a traditional lender such as a bank, building society or credit union. Borrowers can be individuals, trusts or businesses that require either a personal or business/commercial loan. The borrower’s funding and terms are typically structured as an amortising loan (with principal and interest being repaid over time) or an interest only loan (where regular interest is paid and the principal is repaid at the expiry of the loan term).
Loans may be provided on a secured (including registered first mortgages where real estate is used as security) or unsecured basis. The credit quality attached to a loan/borrower and the security offered by a borrower (secured vs unsecured) will generally determine the rate of return offered to the investor.
Investors typically receive a return by way of the borrower’s interest after all fees and charges of the P2P lending platform are deducted. This is typically in the form of a fixed payment with a pre-determined frequency, although the methodology for calculating and paying interest may vary between P2P lending platforms. In some cases the interest rate can be set by investors who compete for the lowest rate via a reverse auction process.
P2P lending allows investors to make loans to individuals or participate in pools of loans to manage risk. In most cases it is possible to invest in a fraction or percentage of a specific loan to further manage an investor’s risk.
An investor decides how much they want to invest and how their money will be used. For example, an investor may be able to choose to fund one loan in particular or be able to invest in a portfolio of loans. Investors may also be able to choose the minimum interest rate and select a loan period that meets their needs. Not all P2P providers are the same, so the ability to specifically choose a loan may vary from one provider to another.
The process in managed by the P2P lending platform. They check the credit, income, debt-to-income ratio, and other criteria of potential borrowers. They set minimum requirements that borrowers must satisfy to qualify for a loan. And they will typically provide this information to investors (sometimes without disclosing identifying information of borrowers) so that they can evaluate the risks and returns of a loan or loan portfolio. In some cases, the P2P lending platform will provide credit scores to assist investors in comparing the relative risk between the loans on offer..
The P2P lending platform also services the loans and collect interest payments. Payments are then allocated to the investors in that loan, less fees that the P2P lending platform collects. In the event of a default, the P2P lending platform manages the collection process, including negotiating settlements. Some P2P providers may also refer any negotiated settlement back to the investors for approval.
Many P2P lending platforms have developed websites that make applying for or investing in a loan simple and straight forward.
P2P lending has been around in Australia for quite some time in various guises. What we now refer to as P2P lending was historically typically only available to high net worth individuals and professional investors seeking above market returns through private debt exposure. These were typically structured as private one-to-one loans or small syndicated loans for a variety of funding requirements including business loans, property investment and property development.
The genesis of the more modern public (as opposed to private) investment offerings can also be traced back to what are commonly referred to as contributory mortgage trusts (or funds). These funds typically provide investors the opportunity to access a secured loan or loans of their choosing. Investor funds would typically be secured by way of a registered mortgage over real estate with the funds used to acquire and/or develop property assets. These types of funds are still available for investment and in some cases have morphed into tech based P2P style operations.
Today we currently have in Australia broadly three types of P2P lending platforms, distinguished by the type of lending and credit exposure.
Property loans – typically provide short to medium term commercial loans for the funding of property acquisitions and/or property development. Loans are usually secured via a registered mortgage over real estate assets.
Business and Cashflow loans – small to medium scale loans used primarily to fund short to medium term cashflow requirements and may include lines of credit. Security may be provided by way of a charge over the businesses assets and future cashflows together with personal/director guarantees.
Personal loans – small scale loans to individuals which may or may not be secured by way of personal assets. Funds may be used for example to consolidate debt, purchase a motor vehicle or fund a holiday.
P2P lending platforms may provide investing opportunities in one or more of these broad categories or in some cases a specific focus within a category (e.g. property development only (for property loans) or a certain business category (for business loans).
The P2P lending platforms typically use web based technology to match lenders and borrowers and generally do not require the same level and type of regulatory capital base as is required by traditional lenders such as banks (which are required to maintain capital to repay deposit holders in the event that their loans default and funds are not fully recouped). This assists in reducing the overheads and in turn offering a better rate on both sides of the transaction.
Investing through a P2P lending platform is not the same as investing in a deposit account with a bank. The Government backed guarantee on deposits does not apply to funds invested through P2P lending platforms. These P2P lending platforms are not banks and are not authorised by the Australian Prudential Regulation Authority (APRA), but are however required to operate under an Australian Financial Services Licence issued by the Australian Securities & Investments Commission (similar to professional fund managers).
Some P2P lending platforms may maintain a fund or provision to compensate investors that suffer losses due to borrower defaults. This provision is typically funded by a small portion of the interest payments across all loans made being held and used to “top up” investor positions where a loss on a particular loan occurs. Investors should check beforehand to see if the P2P platform offers this.
Investors are typically provided with detail about the borrower and the loan, making it easier to match the risk profile of the loan (investment) with the investor’s appetite for risk and return expectations.
By being able to participate in many loans, investors also have the opportunity to diversify their investments to help mitigate risk.
|P2P Platform||Loans types invested in|
|La Trobe Financial||Property|
|Platinum Mortgage Securities||Property|