With interest rates in Australia at an all-time low, many investors are understandably looking for alternative places to invest their hard-earned capital. Low returns and high fees mean every percentage point and basis point makes a difference. The growth in peer-to-peer (P2P) or marketplace lending (MPL) has firmly taken hold in many countries, including Australia, empowering investors to invest directly in non-traditional assets. Across many industries disintermediation has become de rigeur and, for investors, P2P lending the modus operandi.
But it’s not all sunshine and rainbows for investors. Funding P2P loans, like any direct lending activity, carries different sorts of risk. Some more risky than others (read: unsecured versus secured).
P2P investments come in all shapes and sizes from consumer and business loans, to working capital and real estate. There are now numerous options for both lenders and borrowers. To get you started (or a refresher for the P2P veterans) here’s a list of areas to focus on when assessing your options.
Interest rate – a good risk guide
Any investment has an expected interest rate or rate of return and these can vary greatly. And just like traditional investing, P2P investors can earn seemingly high returns. But more often than not, the higher the return, the higher the risk of capital loss. P2P is no different. The interest rate on offer is a good guide to the level of risk and this rate should be considered relative to all other investment options. When investing in P2P loans or assets, investors need to consider the impact of partial or complete loss of their capital.
Diversification – who’s hungry?
Some P2P market places enable the investor to diversify their portfolio in various ways. This includes partial funding of loans or investing in pools of multiple loans – automatically or through a fund structure. Smart investors capitalise on diversifying their exposure to counterparties at every opportunity. If it’s offered, take it. Diversification truly is an investors only free lunch.
Who’s behind the platform?
As demand for P2P products and services has grown, so too has the number of platform providers. Do you know who’s managing the day to day activities of the platform? Who’s doing the due diligence on the borrowers, is it automated or manual, is someone with financial experience ‘eye balling’ the decision making code? As it becomes less and less expensive to operate, more players are entering the market with questionable levels of experience. Be sure to be comfortable with the platform provider before utilising their services.
Investor protection against default
Most P2P platforms do not guarantee or underwrite their loans. While many P2P players work to recover money from a defaulting borrower, generally all costs associated with recouping these monies are borne by the investor. Investors usually decide on whether to write off the non-performing loan or spend more to recover. The decision should be factored into the investment decision at the outset.
The fee structure among the P2P platforms vary considerably for both borrowers and investors. Generally, there are relatively transparent direct fees associated with borrowing and funding loans. Focus on the indirect fees such as early repayment clawback, bank fees or account keeping charges and any GST that might be charged by the platform. All fees associated with transacting on the platform should be included in determining your overall net return.
Investing in Australia’s P2P platforms provide experienced investors access to a diverse range of loans and funding possibilities. There are risks and costs associated with this form of investing but if you are prepared to do your homework, the rewards can add a much needed boost to your portfolio.
If you would like to know more about investing in P2P marketplaces, get in contact with one of our Investment Mangers or give us a call on 1300 38 63 63.