The lowdown on Peer-to-peer (P2P) lending in New Zealand
Peer-to-peer lending feels a bit like the phrases “ruck and maul” to a non-rugby fan – you may have heard of it, but don’t quite know what it means. Over the next few paragraphs, we’ll cover some of the basic of P2P lending, so you’ll be confident enough explaining it to your Mum.
What is P2P lending?
Most people will at some point in their lives, need to take out a loan for various reasons, such as buying a new car, doing some home renovations, or splurging on a fancy wedding. Usually, the first place we’ll go is straight to our bank (or some finance company who’s ad we saw on TV). In this case, the bank (or finance company) will lend you some money, which you will eventually pay back with interest. You are the borrower.
In a P2P lending scenario, the money you need is actually provided by other individuals, who may have some extra savings they’re looking to invest. These people could range from Uncle Richie who’s happy to dip his toes into this form of investing, to larger wholesale investors looking to diversify their investments and (hopefully) earn a higher return. In short, the money you receive is made up of lots of smaller chunks invested by lots of different people.
Who manages the P2P process?
With so many people potentially involved in a single P2P lending transaction (all the Uncle Richie’s investing small amounts, and you receiving the money), there needs to be a place that can manage the entire process, keep track of the repayments by the borrower, and payments to the investors. This is where P2P marketplaces come in.
Companies such as Harmoney and Squirrel Money are P2P lending marketplaces, where borrowers can apply for loans, and investors (Uncle Richie) can pick and choose which loans they’d like to invest in. The marketplace will carry out the necessary ID verification and credit checks to determine the credit worthiness of the borrower before the loan enters the marketplace. Although this concept is relatively new compared to the traditional route of going to the bank for a loan, these companies are licensed by the Financial Markets Authority (FMA) to provide peer-to-peer lending services, so trust or security shouldn’t be too much of a worry.
What are the benefits of P2P lending?
- Firstly, applying for a P2P loan can be done completely online, and in some cases, your loan can be funded in a matter of hours.
- Lower interest rates. This is where technology kicks kicks a*$. Because the P2P lending marketplaces operate digitally, they don’t have any branches or overhead compared to the big banks. This means that for borrowers with excellent credit scores, you can usually get a much lower interest rate from a P2P marketplace, than from a bank. Harmoney’s unsecured personal loan interest rate starts at 6.99% for A1 graded borrowers (excellent credit worthiness), compared to 13.95% from some of the banks (ASB, Westpac). On a $20,000 loan for one year, you’ll save $1392 in interest (not taking into account fees).
- Better loan management. Harmoney and Squirrel Money offer a great online platform to track and manage your P2P loan.
What are the cons of P2P lending?
- If you like to have a face to face chat with someone at the bank, you probably won’t get this from a P2P marketplace.
- Borrowers with bad credit history can find it difficult to get a loan approved in P2P lending marketplaces due to their strict screening process. If you do get approved, P2P marketplaces can sometimes offer higher interest rates. This is because the marketplaces need to protect their investors (Uncle Richie) and offer them a higher return for the additional risk of funding your loan.
Thanks for that, PocketWise. Where do I start?
If you’re looking to borrow from a P2P marketplace, Harmoney and Squirrel are the only licensed marketplaces in New Zealand. Make sure to compare personal loans to make sure you choose one that suits you. If you already have a loan and want to see if you can save money elsewhere, take your free financial checkup today.
If you have any questions that we may have missed, flick us a message on our Facebook page and we’ll try our best to answer it.
That’s all folks!