If you're sick of the high interest rates attached to personal loans from the major lenders in Australia, you may be interested in the new lending phenomenon that landed in Australia a few years ago. It's called peer to peer lending or P2P for short.
The online borrowing and lending platform cuts out the middleman, AKA the banks, and allows you to borrow money directly from investors at a lower rate.
You might be thinking, "Surely it can't be all it's cracked up to be!"... And you're right. That's why we have created this quick guide to run-through what P2P is, who's it good for and what the risks are in this ever-evolving lending world.
While peer to peer lending is pretty established in the US with Lending Club and Prosper and the UK with Zopa, RateSetter and Funding Circle, it's still in its infancy in Australia.
For borrowers, peer to peer lending acts as an affordable alternative to expensive personal bank loans, where those in need of a loan can borrow money.
For lenders with excess money, P2P offers an alternative way to invest with potentially higher returns than other fixed income investments.
SocietyOne (Westpac has an equity stake in the platform), DirectMoney, RateSetter and MoneyPlace are currently the only major players in the P2P Australian game but more are expected to come. All four platforms have a business model based on attracting creditworthy customers who are looking for more competitive loan rates than what traditional providers can generally offer.
Traditionally overseas, P2P providers match individual investors directly with potential borrowers that meet the eligibility requirements. However, Australia is a bit of a hybrid model as lenders are not matched directly with a stranger but invest into a portfolio of consumer loans.
With less overhead costs compared to the big banks, peer to peer platforms can offer borrowers more competitive rates, paid back over a set timeframe often through direct debit.
With the mantra of "people investing in other people", P2P platforms often attract people who are looking outside big corporations for their personal banking. So far in Australia, peer to peer lending is largely focused on the borrower side for regular consumers.
If you're a borrower in need of some cash for your overseas adventure or after a sweet new ride and want lower loan rates than what most banks can offer, peer to peer lending may be just down your money alley.
But it's important to search the financial market to make sure you're getting the best deal. Visit Mozo's personal loan and car loan hubs to compare the loans on offer from the major banks and credit unions as well.
With a low interest rate and fast online application, P2P lending is pretty much a win/win situation for Aussie borrowers. SocietyOne for instance, allows you to borrow amounts from $5,000 to $30,000 over 1-3 years, with no upfront fee, monthly service fee or exit fee.
Here's a look at how P2P loans compare against the Big Banks and other low rate loans from Big Bank alternatives:
|P2P||Big Bank||Mutual Alternative|
|Product||SocietyOne Unsecured Personal Loan||Westpac Unsecured Personal Loan||Newcastle Permanent Unsecured Personal Loan|
|Fixed interest rate||8.95%||14.39% ||7.99% |
|Comparison rate||8.95% ||15.41%||9.33% |
Rates correct as at 15 September 2015.
Low operating costs, generally high yields over a short timeframe and helping others get competitive loan rates make peer to peer lending an attractive option for someone looking for new investment opportunities. While you can generally decide which loans and how much you want to invest, the interest rate for borrowers is decided by the platform.
Peer to peer platforms like SocietyOne and MoneyPlace (at this stage) require you to be a "qualifying individual sophisticated investor" and to fall under that bracket you need extensive investment experience and knowledge. Alternatively investment is open to institutional investors, companies and trusts.
Whereas, RateSetter offers investment options to all Australians, including retail investors and SMSFs.
Maybe the question should be is it regulated? The answer is no. Which makes it a tricky situation for potential lenders, as there is no government guarantee, just like most investments, means you're solely liable if something goes pear shaped. However, one of the options with P2P lending is diversifying your loan portfolio by spreading your investments over many loans with different risk categories.
Entering the world of peer to peer lending in Australia can result in some savvy saving on interest for borrowers, compared to your standard bank loan. But as with all new concepts, make sure you do your homework to avoid the risk of reaping!
Whether you decide to take out a personal loan through a peer to peer lender or traditional provider, here are some tips to help you find the right loan for you:
When you kick off your personal loan comparison, you’ll want to ensure you’re comparing apples with apples by checking what the comparison rate is. The comparison rate has earned a reputation for displaying the ‘true’ cost of the loan, as it uses a calculation to combine the headline rate with some of the fees. While it’s a good way of quickly seeing how much the loan will cost with the upfront and ongoing fees included, keep in mind that only one scenario is used for the calculation (e.g a $30,000 loan over 5 years).
Not all fees are included in the comparison rate, so make sure you check the fine print to ensure you know what you’re signing up for financially. One sneaky fee that you could be bitten with if you take out a fixed rate loan is a breakcost fee for paying out the loan early.
A personal loan that comes with great flexibility can make paying off your loan a whole lot easier. Here are some of the features that we recommend looking out for:
Fee free extra repayments: Imagine a year after taking out your personal loan you receive a bumper work promotion and decide to put some of your hard earned cash into your personal loan to pay it off sooner but when you go to make the payment, you discover your personal loan doesn’t allow extra repayments. That’s why it pays to check that the personal loan not only comes with an extra repayments facility but also allows you to make additional payments free of any charges.
Redraw facility: While we don’t recommend dipping into extra repayments made on a personal loan, as it will increase the term of your loan and the interest you pay, we’ve put a redraw facility on this list as it could come in handy down the track. Say you want to make some upgrades to your home, have sudden car expenses or a new addition to the family is on the way, a redraw facility allows you to draw on those additional or lump sum payments you’ve made.
Flexibility to choose your repayments: Here’s another scenario. You find a personal loan with a great interest rate, get approved and when you go to set up your payments to match your weekly pay cycle you discover the lender only allows monthly repayments. That’s another thing you should be mindful of, some personal loans don’t come with repayment flexibility, so check that the lender allows you to choose your repayment cycle either weekly, fortnightly or monthly when you sign up.