Here, individuals can cut out middlemen like banks and similar financial institutions. Instead, they rely on other individuals to lend them money based on a particular agreement. This process has become fairly popular. Let’s take a look at how this system works in Australia:
How Does Person to Person Lending Work?
There are two main individuals involved in this process – the lender and the borrower. Now, for the lender, peer to peer lending is actually an investment. This is because, as with bank loans, the loans are paid back with interest.
The advantage for the borrower is that the interest rates tend to be far lower than banks, particularly if you have a good credit rating. In many instances, the process also tends to be more straightforward, with less documentation required.
These days, peer to peer lending takes place online, across platforms. These platforms connect lenders and borrowers and allowing them a wide variety of options.
It should be noted that P2P lending has evolved over the years. As a result, you can now find entities giving loans to small to medium-sized businesses as well.
The Top Lending Platforms in Australia
These are some of the more popular platforms for borrowing and lending money:
- MoneyPlace: here, the loan amount can be between $5,000 and $50,000. The loan can be repaid in between 3 and 7 years.
- Plenti: you can take out a loan from $2001 to $45,000. The repayment period is between 1 to 5 years. The interest rate will be fixed at between 6.49% p.a. and 12.79% p.a. depending on your risk assessment.
- SocietyOne: this is for bigger loans, those between $10,000 and $50,000. The loan term is between 2 and 5 years. The interest rate is fixed rate between 6.99% p.a. and 20.49% p.a based on your risk profile.
- Wisr: the loans vary from $5,000 to $50,000, with a repayment period of 3 to 5 years. The interest rate will be fixed and be between 6.49% p.a. and 12.79% p.a. depending on how much risk you carry.
How to Lend Money Legally
You should be aware that not all social lending platforms are suitable for individual investors. There are some that will only accept wholesale or institutional investors. Then, there are others that only work with sophisticated lenders.
Even if you do qualify to be a lender, you have to be careful about the platform that you sign up with. Keep in mind that not all platforms will be equally as reliable. If you want to reduce the hazards involved with this investing opportunity, then you need to select a dependable platform.
After all, there is a certain level of risk involved for lenders. Unlike with banks, these loans aren’t secured. Thus, if a borrower defaults on a payment, you will lose out on your money. Furthermore, the Government Backed Guarantee on Deposits doesn’t apply to P2P lending. As a result, you will not be able to get any aid from the government.
When looking to sign up with a lending platform, take the following precautions:
The easiest way to know that you are signing up with a good lending platform is to check their credentials. They should either be an Australian Financial Services licensee or an Australian financial services authorised representative.
This is easy enough to check. Simply head to the ASIC Connect’s Professional Registers and look for the name of the platform there.
Read Product Disclosure Statement
Every lending platform is different from each another. As such, it is important to know precisely what you are signing up for with any platform. One way to appreciate the operational aspects of a site is to read the product disclosure statement. Here, you should find the level of risk and cost involved.
Pay particular attention to the default rate of the website. Make comparisons to learn which sites have a higher rate. Bear in mind that if you do register with these platforms, that you may be taking on a greater level of risk.
Examine the Rates
You should also check the interest rates set up by the site. This can give you an idea of what kind of profit that you can expect with each platform. Now, interest rates can be set based on two algorithms.
The most common option is to have a fixed rate – this doesn’t change throughout the period of the loan. However, the exact interest rate will depend on the risk level of every borrower. Thus, low-risk individuals will have to pay a lower rate while less reliable ones will have to pay a higher one.
Then, there is the personalized interest rate. This takes a look at a person’s credit rating, other financial information, and their loan. Then, the interest rate will be calculated according to these elements..
Choice in Borrowers
You should also learn how much choice you have when it comes to borrowers. All lending platforms will maintain a borrower’s privacy. As such, you will not know who you are lending to. Nevertheless, you will still have access to various relevant financial information.
You should be aware of whether you are allowed to pick a specific borrower or if one will be chosen for you. It is also a good idea to determine if you can split a loan between several investors. Doing so can reduce the risk involved in this venture.
Understand Repayment Periods
Crowd lending, as with regular loans, can involve widely varying payment periods. It can be as little as 1 year or as much as 7 years, depending on the loan. Therefore, you need to have a good understanding of just how quickly you will be able to get your money back.
How is Risk Assessment Carried Out?
Not all lending platforms are stringent with their risk assessment. Thus, you should always know exactly how this process is carried out. You need to be certain that the appropriate steps are carried out to accurately determine the level of risk posed by each and every borrower.
Know the Protocol in the Event of Defaults or Failures
As mentioned, it is possible for some borrowers to default on their loans. There is also a chance that a particular lending platform may fail and close up their business. Check what procedure will be in place should these events take place. Opt for a platform that will help you get at least some of your money back in either of these instances.
Be Aware of All the Fees Associated with an Account
There can be hidden costs involved when signing up with these lending platforms. Some may charge you various account management fees, while others will find various other ways to get money from you. Make sure you aware of all possible charges ahead of time. After all, your goal here is to make money with this investment opportunity.
How to Get a Lender
These are the aspects to be aware of if you want to become a borrower:
Reliability of Platform
It is just as important for borrowers to check the credentials of a lending platform. Make sure that they are licensed by the proper authorities and that they are associated with credible banks. This ensures that you will be charged fair rates.
Every platform has individual eligibility requirements. Make sure that you fit the criteria for a particular site. The criteria do tend to be fairly straightforward – age, specific earning amount, etc.
On the surface, it can seem that P2P lending platforms will offer you lower interest rates. However, this isn’t always the case, particularly if you are considered a high-risk borrower. In this case, the interest rates may be far higher than most banks. Due to this, you should always do your research and make certain that you are getting a fair rate.
On a similar note, also check the rates of opening up an account with a particular lender. Are their continuous or hidden fees involved? Will it cost you a great deal of money to open and maintain an account on a particular site?
Always go through the loan terms and make sure that you are aware of all the terms and conditions. This includes interest rates, additional fees, charges against early or late payments, and more. Once again, this gives you a more definitive idea of what you are signing up for.
This is what you need to know about peer to peer lending in Australia. When done right and with favourable terms, it can be a great opportunity for both lenders and borrowers.