Australians’ love affair with debt finance ranks amongst the highest in the world, thanks in part to our obsession with home loans, car loans and personal loans to keep pace with the inexorable rise in the cost of living.
As more and more horror stories emerge from the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry borrowers seeking affordable finance options are increasingly turning to alternative forms of finance.
As the number of P2P platforms actively lending to borrowers continues to increase, the benefits of the model continue to make waves in the finance industry. As the pool of prospective borrowers continues to expand we are likely to witness this trend gaining momentum throughout 2018.
For savvy borrowers shopping for low-interest rates, a streamlined application process and lower fees, P2P lending is proving to be a cost-effective and innovative alternative for many Australians.
Hence, we are witnessing the rising acceptance of peer-to-peer (P2P) lending. P2P lending networks bypass the role of a traditional bank as a primary source of loans and instead connect investors and borrowers directly via an intermediary lending marketplace.
Examples of common P2P platforms active in Australia include SocietyOne, MoneyPlace, ThinCatsAustralia, RateSetter, Wisr, Marketlend, Harmoney, Bigstone and OnDeck.
Investors participating in P2P marketplaces include both individuals and companies. They invest their funds with a P2P platform and generate profits by charging a fee including and interest to both lenders and borrowers.
How P2P Platforms Work
A borrower’s eligibility for a loan is assessed by the P2P provider based on the borrower’s credit and employment history. This criterion determines the borrower’s individual interest rate. A borrower then repays their loan via the lending platform, which in turn distributes the repayments to the original investors.
P2P lending is drawing attention in the personal finance lending space. P2P’s high yields are a major attraction for investors; however, the P2P model offers attractive benefits for borrowers using the P2P platform.
Competitive Interest Rates
Borrowers to date have been successful in borrowing at interest rates lower than those on offer by Australia’s traditional bank lenders. This provides borrowers with the opportunity to access funds at a competitive interest rate, effectively reducing the borrower’s interest costs over the life of their loan.
While interest rates on the P2P platform are tailored to each individual borrower, interest rates on a P2P platform typically range from around 7 percent through to 27 percent depending on the applicant’s credit history and ability to service the loan.
Efficient Online) Application Model
P2P lending offers a fast and efficient alternative to the paperwork imbroglio involved in traversing the procedural rapids of Australia’s traditional banks.
P2P lending is assessed and determined online, ensuring the entire application and associated transaction process is speedier than traditional bank-based lending methods.
Lower Fee Structure
The cost savings generated by delivering lending transactions entirely within an online environment effectively lowers the traditional fees and charges associated with accessing finance.
The absence of physical bank infrastructure, layers of lending management and shareholders minimises the fees charged to P2P borrowers.
Unlike traditional lenders, there are no penalties or higher interest rates for a borrower looking to use their borrowed funds for higher risk applications such as debt consolidation or to cover medical expenses.
4 Reasons Borrowers Come Out In Front With P2P Lending
The primary benefits of the P2P model to borrowers revolve around the speed of the funding process, lower interest rates, higher funding rates, and the ease of the application process.
- Streamlines Application Process: Provide a few items of personal information with your online application and you can receive a loan approval almost within minutes. Simply apply anywhere you have online access.
- Competitive Interest Rates: The two largest P2P lenders in Australia are quoting rates of around 7percent for their best customers. Approved borrowers are presented with repayment alternatives ranging from one, three, or five years. The final interest rate is adjusted up or down based on the borrower’s preferred term
- Speed And Efficiency: Funding an approved loan usually takes between one and three weeks depending on the loan size. Some small loans under $5,000 can be filled in a few days and fully funded in under a week
- Higher Funding Levels: Funding limits have risen significantly over time, ranging from $1,000 to up to $35,000.
3 Reasons Lenders Come Out In Front With P2P Lending
Not all of the benefits of the P2P lending model apply to borrowers. Lenders enjoy above market rates and have the ability to spread their risk through a portfolio of transactions.
- Amortising Risk: With P2P lending, individual lenders typically contribute in increments of $25 or $50. The premium yields realized by P2P lenders Investors is attractive while an investment in a P2P marketplace acts as a hedge to the stock market
- Higher Returns: With current returns averaging close to 10 percent depending on the loan type the investor selects lenders are finding P2P a viable alternative investment option, especially if it is diversified across a pool of pre-qualified borrowers
- Lenders Enjoy Choice: P2P lenders categorize prospective borrowers for lenders in their network. Lenders can choose only to invest in the form of loans they are comfortable with. Lenders can elect to invest only in borrowers that match their preferences.
Peer to peer lending is a model that has proven itself to the market over the past five years and is making the transition into becoming a more mainstream lending option, thanks to its combination of benefits for both prospective borrowers and lenders.
Why Income Investors Should Explore P2P Lending
Recent moves by central banks to raise interest rates have spooked bond markets and this may have a flow-on effect on investor psyche. As interest rates rise, bond prices decline as new bond issues pay higher rates.
This extended period of low-interest rates have forced income-driven investors to either accept lower yields or to take onboard greater risk, by investing in dividend stocks, real-estate investment trusts or business development companies.
Hence, long-term investors seeking income are increasingly looking to hold their own paper in the form of a P2P investment.
P2P platforms represent an alternative income source that may fit the needs of income-driven investors. However, potential P2P investors will need to take the time to understand the risks and rewards involved in investing in these comparatively new platforms.
With the problems besetting Australia’s traditional lending markets in recent times and continued economic turbulence, P2P lenders have proven the validity of their business model, processes and systems and seem set to thrive. Unaffected by fallout from the Royal Commission, and fuelled by maturing P2P networks, the largest P2P lenders combined have loaned almost half a billion dollars to their clients. This represents some 63,000 individuals and business owners since the advent of the P2P financial platforms.