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P2P Lending

P2P Lending

 

P2P lending is a topic I have been wanting to do for a long time but I never had the experience or expertise to write about it. I’m the kinda guy that actually likes to do something before I claim any knowledge on the subject. There are people out there believe it or not, that actually give seminars and speeches about how to become master in topic X without ever actually have been a expert in the first place.

 

Anyway, peer to peer (P2P) lending has been an interest topic of mine for about 2 years now. And when a reader emailed me with their experience with P2P lending I thought it would be a good opportunity for a guest post. 

Chris has been investing in P2P lending platforms for over 2 years and he was kind enough to share his experience with us. 

So without further adieu, here is the post. Enjoy 🙂

 

 

 

P2P Lending Guest Post

 Several years into my FIRE journey I was seeking more diversification, more yield, and more interesting ways I could take control of my investments. Already I had delved into the share market, given managed funds a second chance (a story for another day). Then, one dark & stormy night, while searching across the digital internet on my electric computing device, I came across something called Peer-to-peer (P2P) lending.

 

Reddit and Whirlpool, where all the cool kids hang out, wasn’t much help in terms of details – just a few mentions here and there about UK company, RateSetter, entering the Australian market.

 

Magnets, How Do They Work?

I was able to discern that P2P lending, broadly, involves lenders/investors, being able to choose where their money is invested using online platforms. This is in contrast to a Real Estate Investment Trust, or index fund, where the investor’s money is managed by someone else. ASIC has a nice little write-up here (https://www.moneysmart.gov.au/investing/managed-funds/peer-to-peer-lending).

 

Each P2P provider does things in their own way, but it seems common across all platforms that these investments are very risky, often uninsured, unsecured, and can have a very delicious return.

At the time (December of 2015) the major players were RateSetter and SocietyOne.

SocietyOne is only open for the “sophisticated” investor – with a hefty minimum investment of $500,000, while RateSetter had a minimum

investment of $10… So, ugh, RateSetter it is!

 

My Experience With RateSetter

RateSetter operates both personal loans and business loans. Lenders elect what rate of return they want, what amount of money to lend at that rate, and for how long (1 month, 1 year, 3 years, 5 years). Then, they are matched to a borrower, who is seeking the lowest rate they can get. This makes the market a bit competitive as lenders undercut each other in order to get their money matched to a borrower.

In this competitive market borrowers can snag rates better than what a bank would offer them, if the bank would lend to them at all. I’m going to paste in two screenshots now. The first is from December 16th 2016, and the second is from January 12th 2017. You can see how competition and demand can affect the rates over the course of just one month.

1 – December 16th 2016.

P2P Lending

2 – January 12th 2017.

P2P Lending

After assessing the PDS and reading about the risks involved, I decided that $5k was appropriate for me to start lending. I watched the 1-year market, selected a 5.9% rate (which was slightly above the last match) and I got matched in a few days.

This turned out to be a good rate, as competition pushed the rates down a full 1% a few months later.

Given the Peer-to-peer nature of the platform, I was expecting a little more involvement on my behalf in the matching process, and later I’ll discuss MarketLend which has exactly the level of control I was expecting. Then again, I can see how some people might prefer the ease of RateSetter’s automatic matching.

The 1-month and 1-year markets in RateSetter are structured very straight forward. Your returns are paid once per month at the rate you were matched and at the end you get your principal back.

In the 3-year and 5-year markets, however, both the interest and part of your principal are returned each month.

None of RateSetter’s loans are secured but there is a “provisional fund” from which they can compensate lenders for losses at their own discretion. Information on how often this happens is hard to come by (my Google-fu failed me).

Over the course of the investment, here are my interest payments:

 

Jan/2016 26.73
Feb/2016 23.49
Mar/2016 23.49
Apr/2016 26.73
May/2016 22.68
Jun/2016 25.11
Jul/2016 25.92
Aug/2016 23.49
Sep/2016 25.11
Oct/2016 25.11
Nov/2016 24.30
Dec/2016 23.49

 

So… what to do now that’s finished?

Well, I delved straight back in again and got matched in the 5-year market at 9.5% 🙂

And RateSetter provide a nice little schedule of payments for the life of the investment.

P2P Lending

As you can see, this time, in the 5-year market, a portion of my principal (“Capital” column) will be returned each month, and my interest earned is reduced accordingly.

When these payments start rolling in, I will give the “auto-bid” feature a crack. With the auto-bid, payments made to your holding account can automatically be reinvested in the market and rate you specify – either a set rate, or the current market rate. Very handy!

 

My Experience With MarketLend

My good experience with Ratesetter made me a little braver when I decided to try out MarketLend. I threw $10k at it in August 2016 and payments started in September.

This is a platform which focuses on business loans.

Some loans are insured, some are uninsured. Some loans are for supply chain financing – where MarketLend will own the supplies – and some are simply a line of credit. One of the more interesting loans I’ve seen was for a short-term money lender. I was an investor, lending money to a business to lend money to a business to lend money to people… Hold on while I go watch “Inception” again….

 

MarketLend advertises these loans to investors in the form of units, each valued at $100. I.e. if i want to lend $1000, I would bid on 10 units at the rate I want. At any time another investor can undercut my bids, introducing a competitive element here as well.

P2P_Lending

Those high percentages might look amazing but hold on… because I should tell you about utilised versus unutilised parts of the loans – which will affect your return.

In these loans, the borrower might not access all of the capital which is on loan. The money which HAS been accessed, is the “utilised” amount. The rest is “unutilised”. This is important because your return (of say 18%) only applies to the utilised amount. So, even though you might be lending out your money at an amazing 18%, your gross return will be much less. Then MarketLend takes out their fee and your pre-tax return might be %8 (this is my actual average return so far across all my units).

Borrowers could also back the loan early. In which case you get your principal back early, the loan ends, and you are free to carry on your merry way – maybe withdraw the money, maybe invest in more units.

What I really like about MarketLend, is that credit checks and financial statements from the borrowers are available, so you can get very acquainted with them before deciding to bid.

This is the level of control and information I was looking for in a Peer-to-peer lending platform.

In the interest of diversification, I spread my $10k around many different borrowers at many different rates and levels of risk. Here’s a sample:

P2P Lending

And here’s my returns so far:

Month Amt Real Return
Sep/2016 34.60 4.15%
Oct/2016 74.87 8.98%
Nov/2016 81.55 9.69%
Dec/2016 76.56 9.10%
Jan/2017 83.53 9.83%

 

I have used my returns to buy additional units, so I currently have $10,300 invested.

P2P Lending

Finally, MarketLend features a secondary market where lenders can sell off their units to other lenders. This is useful if you no longer wish to carry the investment, or just need some liquidity.

I’ve picked up a few discounted units here – it’s definitely worth a look if you decide to go down this path.

 

Conclusions

P2P lending is cool. It’s high yield. And comes with high risk (so read those PDSs).

I like how MarketLend lets me choose who to lend to and the ability to make an informed decision – but RateSetter is also nice so I will continue to use both.

Ratesetter MarketLend
Pros’s

Website looks and feels more professional.

Predictable returns.

Provisional fund may reduce risk of loss.

More information and more control and over lending.

Easier to diversify investments.

Secondary market allows selling/buying units.

Australian owned & operated.

Con’s

Little control over matching process.

Did not notify me when my investment ended.

The queue-like structure delays matching.

Utilised/unutilised was confusing at first.

No Bpay facility.

Did not notify me when one of my investments was repaid early.

 

What’s Next?

Another P2P platform caught my eye recently; Brickx. These guys break down a house mortgage into 10,000 units, which investors can bid on, buy, and trade with each other.

Returns come from cash-positive rental income, or capital gains in a sale. I have a bit of saving to do, and a couple of impending financial commitments to get past, before I’m ready, though.

For now, my P2P returns will continue to be reinvested. Due to the nature of the investment, I should expect some losses over time, as borrowers default or make late payments, but that’s why we manage our risk.

-Chris

 

Wow, what a quality insight into the world of P2P lending. I would like to thank Chris again for putting that amazing post together. If you have any questions about it please feel free to comment on this article. Chris has agreed to answer your questions in the comment section below.

Show Notes:

16 Responses to P2P Lending

  1. Thanks so much for this. I have identified P2P as something I would like to play with as a satellite investment somewhere down the track (for Chris’ reason of “more interesting ways” to invest.) Hearing from someone who has experience with the two platforms, and being able to see the screenshots is really helpful. Bookmarking for the future.

    • No worries Mrs ETT 🙂 You should be thanking Chris though. He put a lot of work into this. Happy to hear positive feedback

  2. I’ve been using Ratesetter since the day it was launched in Australia – I’d been watching them and Society One for about two years waiting for my invite. I have to say that I LOVE it. My investments rarely wait for more than a week to be matched with the reinvestment facility (Chris called it auto-bidding)

    I set all payments from my 5 year investments to be reinvested in the five year market. Consistently seeing 9%+ returns (From memory, Ratesetter takes 1% of your interest payments, an absolute pittance!). For me it has been the ultimate set and forget investment, and within 2 years I’m now seeing returns of $100p/month.

    I could wax lyrical about Ratesetter for hours. Every single friend who asks me where they should start investing, this is my choice for them. Ratesetter has 100% repayment rate in Australia, and their original UK company has not cost investors a single dollar. Reading between the lines, some people have defaulted on loans, and only the capital is returned to the investor. So there is the potential for a zero return, but it still gives me warm fuzzy safe feels.

    • Sorry – 10% of your interest is taken as fees, but it is rounded down, so…

      $1000 invested at 9% generates a $90 return over the year. Of that $90, $9 is taken by RateSetter. So you’re $90 return becomes $81 and your 9% becomes 8.1%.

      So your return is generally about 1% less than the listed rate. That’s why I was thinking 1% 🙂

      It’s interesting they choose to round down though. The smallest loan you can make is $10, so my monthly payments for a $10 loan are generally less than 10c ($10 * 9% / 12payments = 7.5cents) and they don’t take a fee out of that.

    • It’s nice to hear about someone else using P2P with success 🙂 I felt a bit alone when I dived into that ocean.

      Checking out your site, and omgosh, a fellow chainmail enthusiast? 😀
      I made a mail byrnie back in 2011-12. Took hundreds of hours but it was totally worth it.

    • Thanks for your reply LadyFIRE. VERY interesting to hear about your positive experience. After reading that and speaking to Chris about it..shit, I think I’m ganna have to dip my toes in ?!

      • Dive in! I absolutely love it. I think I may have over-loved it and I’m in the process of trying to balance it. My Ratesetter investment once sat at about 50% of my portfolio (ignoring real estate).

        Those returns are just to tempting, got to diversify!

        And @Chris – Chainmail is good fun, although I wouldn’t go so far as enthusiast! But I do love being able to make something out of (almost) nothing. I think I bought an $8 coil of fencing wire and churned out six or seven bracelets before my hands got tired.

  3. I’m currently invested with New Zealand-based P2P platforms, Harmoney and Lending Crowd. Both have different structures with different levels of risk and return. I’ve been with Harmoney for about 18 months and am getting a net annual return of around 15% although it’s higher risk with unsecured loans. Lending Crowd have secured loans and I’ve been investing through them for around 4 months. Net return there is around 12.5% albeit with lower risk.

    Both have set rates for the borrower depending on their assessed risk level. The lender then gets the interest and principal repaid minus a 10 to 12% fee on the interest paid.

    As you rightly point out, it is a higher-risk investment so I am limiting how much I have invested to $50k. But I still consider it a valid investment option. Just have to understand the potential downsides when considering it.

  4. Thanks for the post Chris,

    Great podcast listened to it this morning on my daily commute.

    ‘Cloak and Dagger’ ‘I’ll edit that out’ gave me a good laugh its still there.

    I heard about P2P over a year ago too but it was SocietyOne and when I checked it out the sophisticated investor hurdle through me off. It’s something that I will consider in the future and like yourself would probably limit to 10% maybe 15% of my portfolio.

    Cheers,

    FIitOut

    • I haven’t listened to the final podcast yet… Mr Firebug left that in?? oh no! D:

      A long while ago I added myself to SocietyOne’s mailing list just in case they did make smaller investments an option.

      You could also look into ThinCats and MoneyPlace.
      Shop around 🙂

      • I genuinely LOL when that was pointed out! How did I miss that!? Ahh well, Lucky we are both anonymous plus I doubt anyone at Rate Setter will even visit this website let alone listen to the podcast ���?���

  5. Is brickx a p2p lender? After having a quick look, it appears to be fractional ownership of the underlying property.
    Is there maybe a different section of the website they do mortgage lending p2p?

    • I haven’t done too much research into it tbh. I think it’s like a REIT ETF where you can get exposure to the real estate market with minimal capital by only owning a fraction of the property.

      I could be wrong though so please do your own research if you’re looking to invest.

  6. Hi

    Andrew her from RateSetter. We’d be more than happy to chat to you about how RateSetter works. It’s an exciting time for peer-to-peer lenders and investors. Lots of choice and transparency is a good thing!

    Cheers

    Andrew

  7. La Trobe Financial also offers P2P lending in addition to its standard pooled credit fund. The advantage over RateSetter is that the loans are secured by a mortgage over the property, which means lower risk than the unsecured loans offered by RateSetter. This feels like a better risk/reward ratio to me, but check it out for yourself. Disclosure: No investment in either product, but currently interested and investigating both options.

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Nothing on this site is legal financial advice only the opinion and thoughts of an anonymous blogger. Always seek a licensed professionals advice when dealing with personal finance

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