Uber did it with taxis, Airbnb did it with accommodation and P2P lending platforms are doing it with money.
It’s your typical sharing economy zinger - P2P lending platforms don’t actually lend money, instead they link up potential borrowers with individuals or companies who are willing to act as lenders. Some companies actually split up the money you invest so it sits with a number of different borrowers so, in theory, the risk of losing your money is reduced. Basically, the lending platform cuts out the banks in exchange for an arrangement fee. Outcome: the lender achieves higher interest rates and the borrower lower interest rates than would be on offer if either had gone through a bank.
Here’s our top 5 things to know if you want to dabble in the world of P2P lending:
- It’s legit. There are some regulatory requirements (for instance the platform will require an Australian Credit Licence) but P2P lending is perfectly legal in Australia and there are companies doing it.
- You’ll be lending to strangers and relying on the platform to do credit checks and establish the borrowers’ creditworthiness. We know this goes against your fear of strangers, but apparent levels of default on loans in the more established markets in the UK and USA have been relatively low and business is booming.
- Some platforms use behavioural data to determine a borrower’s creditworthiness – sometimes called “triangulating the truth”. This can involve looking at how often applicants use capital letters, or move the mouse while filling in an application form to tell if someone might be a good credit risk (we have no idea how this works, either. AnD iT jUst soUnds wEiRd ... Oops, there goes our credit rating.).
- As a lender, you need to accept the risk that you might lose your money. It is, after all, an unsecured loan. However, in an attempt to make you feel better, you can choose your risk profile when you invest - the higher the risk, the greater the return.
- Forget the idealism of individuals borrowing from individuals - this is business. Institutional investors (read hedge funds, large organisations, etc) provide a lot of the finance coming out of P2P platforms, it’s not all just Joe Public.
Oh, and if you’re wondering who HENRY is, it’s a “high earning, not rich yet” person. Where would we be without some industry jargon to confuse everyone?