You’ve heard the saying ‘there’s more than one way to skin a cat’. Well there’s more than one way to create a passive income. Over the years I’ve been looking at different methods and opportunities to create another stream of income. One of these streams was Peer to Peer lending (P2P). But if I’m being honest… I don’t know much about it. So I did some research and came across Nicholas from AussieMoneyMan. I reached out for his advice and he’s offered to give some info to the readers of Stock Up with Joe.
Peer to Peer Lending 101
Hello all, my name is Nicholas G. Muscat also known as the AussieMoneyMan (AMM) here in Australia. Today I will be introducing you to Peer to Peer Lending (P2P Lending) giving you a run-through of what it is, why you may use it, its risks and benefits and more.
First thing is to note AMM does not hold an Australian Financial Services Licence (AFSL). Therefore, we cannot give individual financial advice and any financial advice as a whole, including general. We present facts and figures from experiences using various platforms and fit into exemption (s911A(2)(ec)) as the sole and principal purpose of our content is NOT to provide financial advice but is rather factual information.
What is Peer to Peer Lending:
Peer to peer lending matches people who have money to invest with people who are looking for a loan. A more appropriate term for this practice is marketplace lending because an online platform, usually a website, is used to match investors with borrowers. Over the last three years, we have seen a huge increase in the prevalence of such investment providers. Even though the term marketplace lending best describes this type of lending, on this page we refer to it as peer to peer lending (or P2P lending) as these are the terms most people use.
Why Peer to Peer Lending:
There are a host of reasons why you may choose to invest through P2P lending. These include diversifying one’s investments outside of stocks or other investment instruments, a high return on investment, and an easy method of investing. It is important to note the high rate of return simply comes from the fact the platforms are purely online. Meaning fewer overhead costs and thus can offer lower interest loans.
Why Peer to Peer Lending over traditional investments:
There are many reasons why you may choose P2P Lending over stocks, bonds or real estate. Some of these might include more attractive returns, a means of diversification, a simple way to start investing, the ability to better control risk or many others.
What are the risks?
I did a pretty deep dive into the risks of P2P Lending back in 2018 which you can see here.
In short, you are looking are things like but not limited to:
Platform Risk
Platform risk refers to the risk posed by the P2P platforms themselves. E.g. RateSetter, Truepillars or Wisr. Each one of these businesses runs the risk of going bankrupt and in this case, you would most likely lose your funds. So, in essence when you invest in one of these platforms loans you are somewhat investing in the platform itself.
Borrower Risk
Borrower risk is also known as credit risk or default risk and refers to the risk of a default (where the borrower fails to pay back the loan).
Cash Drag
Cash drag refers to the risk of a reduction in ROI (return on investment) as a result of funds sitting idle in a holding or similar account.
Policy Risk
There is always the chance of governmental rule implementation or changes that can affect investment.
Market Risk
Market risk is the risk that comes from the fluctuations and movements of the entire financial market such as interest rates.
Some common Peer to Peer myths:
Like any financial instrument, there are many myths around P2P Lending but possibly more than you would expect.
One common myth is that only those who cannot get loans from banks take loans from peer to peer lenders and thus it is a risky investment. This is simply not true. Many platforms require an at least average credit score/history before one can take out a loan with them. Further, platforms often offer lower interest rates than banks due to their lower overhead. These are simply two of many reasons this myth is untrue/unfounded.
Another is that there is little to no diversification. Diversification varies by platform. Even in those that offer the option to fund only one loan can be diversified by choosing to fund multiple loans. Moreover, you can choose to invest in many loans across many platforms.
I previously covered a bunch of common myths here.
How to get started with P2P Lending:
Well once you have decided P2P lending is your investment instrument of choice, or at least one of them, depending on your country there will be differing platforms (e.g. in Australia we have RateSetter and Truepillars amongst others). Your first step may be to look at what platforms are available and compare them (I did this for Australian platforms here). Next, you may wish to take a good look into your chosen platform/s to decide how you wish to invest on that platform. For example, some platforms allow you to select your risk tolerance. Once you do this you can go ahead and start investing!
Sometimes platforms offer bonuses when you sign up which can be quite good. For example, Ratesetter, an Australian platform, offers a $100 AUD bonus when you invest your first $1000 in their 3 or 5-year market as long as you sign up using this link.
Thanks, Nick for the insight to P2P lending and the helpful articles you’ve produced. It certainly does seem like something I would like to investigate, particularly for a long term investment.
If you want to get in touch with AussieMoneyMan, you can reach him here
If you’re after more posts to read, i suggest looking at my finance, investing and eToro posts!
Interesting! I went with eCrowdFundr to create my P2P lending website for my business. Best P2P Lending and crowdfunding platform provider, offers crowdfunding tools for P2P lending and donation, rewards, equity, real estate.