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How does peer-to-peer (P2P) lending work?
26 Oct 2016
What is P2P lending?
Peer-to-peer (P2P) lending is a direct loan offered from lenders to borrowers through a secure online platform. This commercial arrangement is offered by various non-banking organisations (P2P platforms) to enable borrowers to tap into spare cash that investors are willing to lend.
Peer-to-peer finance is a relatively new concept in Australia, although it is well established in countries such as America and the UK. The past few years have seen a significant increase in the number of P2P lenders in Australia and there are now P2P platforms catering for various types of lender and borrower.
How does P2P lending work?
Peer-to-peer lending involves borrowing money without going through a traditional lender such as a bank, building society, or credit union. The money comes from investors, who can be individuals or companies. It can be used by individuals or companies that need a personal loan or a business loan.
An investor decides how much they want to invest and, depending on the lending platform, how their money will be used. For example, an investor may choose to fund one loan in particular, or to invest in a portfolio of loans (which may reduce the risk of losing all your money). In addition to this, investors may be able to choose the minimum interest rate and select a loan term that fits their needs. However, in some cases, the investment decisions will be made by the platform operator or the investment manager.
When borrowers apply for a loan, the platform operator will evaluate their suitability by checking their credit history and their capacity to repay the loan. These factors allow the platform operator to assess the lending risk. Not all platforms disclose the lending risk of each borrower.
The platform operator keeps the personal details of all investors and borrowers confidential.
Things to check when choosing a P2P lending platform
The Australian Securities and Investments Commission (ASIC) have put together a list of things to check before you invest in P2P lending or borrow from P2P lenders:
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Security – Are the loans secured or unsecured? |
| Interest rate – Who decides the interest rate and how is it determined? | |
| Choice of loans – Can you select which loans and/or borrowers to invest in? Can your investment be spread over more than one loan? | |
| Repayments – How long will it take before you get any money back from the borrower? | |
| Getting your money back – Do you have any cooling off rights if you change your mind? Do you have the ability to redeem your investment and get your money back? | |
| What if the borrower defaults – What will the platform do to recover your investment? Who pays the legal expenses associated with any recovery action? | |
| What if the platform fails – What will happen if the platform operator becomes insolvent or goes into external administration? | |
| Fees – Are there any fees payable to the platform operator? Is there a fee when you invest as well as a fee for handling repayments or accessing your money early? |
Source: ASIC
Before signing up for p2p lending…
Before you sign up for a loan through a P2P lending platform, you should always read the information on their website and any loan documents to make sure you understand the terms and conditions of the loan. You should also check whether you need to pay any upfront fees to set up the loan, and make sure you shop around and compare the different loans being offered by traditional lenders.
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