Today’s investors face an investment landscape of growing complexity.
In the light of investment volatility and a record low cash rate, many investors are on the hunt for investments that can provide stable, cash returns to their portfolio. That’s where peer-to-peer lending comes in. This innovative investment model provides retail investors with access to the established asset class of consumer credit, helping them earn stable cash returns.
For many years, banks have had sole access to the benefits of this asset class.
Today, peer-to-peer lending is experiencing rapid adoption amongst thousands of retail investors. In April, the Australian Securities and Investments Commission (ASIC) found the number of retail investors as at 1 July 2018 is 79% higher than as at 1 July 2017, and the total number of retail investors has more than quadrupled since 1 July 2016.
So, what exactly is peer-to-peer lending and how does it fit into an investor’s portfolio?
What is peer-to-peer lending?
Broadly speaking, peer-to-peer lending uses technology to match borrowers with investors. By using clever technology and eliminating the operating costs associated with maintaining ‘bricks and mortar’ institutions (such as banks and credit unions), peer-to-peer lenders can pass the savings on to customers in the form of more competitive interest rates for borrowers and better returns for investors.
Platform operators, such as RateSetter, assumes responsibility for the following functions:
- Assessing the creditworthiness of loan applicants, by rigorously evaluating a borrower’s credit history, employment status, credit score
- Managing the loan lifecycle including establishing loan contracts and facilitating payments between borrowers and investors
- Managing each investor’s portfolio
Investors enjoy the economic benefit of the loans to which their funds are matched, which means that they receive the borrower payments of principal and interest each month, but may also suffer losses if a borrower to whom their funds are matched fail to make timely repayments or default on their loan. Some peer-to-peer lending platforms, including RateSetter, may offer a form of protection against losses, through a ‘Provision Fund’. This is a pool of funds, held solely for the benefit of investors, that can compensate investors in the event of borrower late payment or default.
How is peer-to-peer lending regulated?
ASIC regulates peer-to-peer or marketplace lenders. Under Australia’s financial services and credit laws, providers of marketplace lending products and related services will generally need to hold an Australian Financial Services (AFS) licence, and an Australian credit licence where the loans made through the platform are consumer loans (e.g. loans to individuals for domestic, personal or household purposes).
Why should investors consider adding peer-to-peer lending to their portfolio?
Peer-to-peer lending offers investors a straightforward way to enhance their investment portfolio’s risk-adjusted returns. Key peer-to-peer advantages investors have identified include:
- Access to one of the world’s largest and best-established asset class (consumer loans): Previously, this asset class could only be accessed by banks. With peer-to-peer lending, retail investors can take advantage of it too. Consumer loans have historically demonstrated remarkable resilience, even during economic downturns, because they’re tied to essential purchases, such as vehicles, home repairs and education.
- Attractive returns: With peer-to-peer lenders such as RateSetter, investors can access returns of up to 8% p.a.^ Investors will receive regular payments as borrowers’ repayments are made, which investors can choose to withdraw or automatically reinvest.
- Investors can build stability into their portfolio: As a fixed-income asset, investors build resilience into their portfolio, enjoying ongoing returns even if market fluctuations reduce the value of other investments. RateSetter’s Provision Fund* has ensured all investors on the platform have received 100% of principal and interest as due.
- Control over rates: With some platforms investors can set their own rates with guidance from openly available market data. The lowest rate on offer is automatically matched to the next borrower loan.
- Efficiency: By combining modern technology with a new disruptive business model, operating costs and expenses can remain low for peer-to-peer lenders. This means investors pay low fees, earn better returns and borrowers also benefit from lower rates.
- Transparency: Some leading peer-to-peer lending platforms, like RateSetter, have public loan books and clear fee structures. As such, investors can rest assured that they won’t be stung by hidden costs, commissions, or charges.
Investing in a portfolio of peer-to-peer loans can be compared to some other investments such as corporate bonds or hybrids. Like a bond, a peer-to-peer loan is a fixed-income asset with a set duration and predictable returns, although unlike many bonds, peer-to-peer yields do not fluctuate with day-to-day market fluctuations. Also, unlike other fixed-income investments, with a peer-to-peer investment, investors set the interest rate and the loan term (for example, one month, three years, or five years).
Peer-to-peer lending can be particularly useful for self-managed (SMSF) superannuation fund trustees who wish to transition their portfolios away from more volatile equities as they near retirement. Peer-to-peer lending can generate income for SMSF portfolios and can avoid large asset sales or withdrawals (e.g. from selling stock or other assets), as borrowers make cash payments each month. Investors can also arrange for any loan repayments to be automatically reinvested into the peer-to-peer lending market to continue to accrue returns with minimal intervention.
In short, peer-to-peer lending should be considered as a way to diversify and strengthen an investor’s portfolio alongside traditional fixed-income assets, like bonds and fixed-income funds.
Individuals, companies, and trusts (including SMSFs) can invest with RateSetter. Click here to learn more and start investing today.
^”Earn up to” rate represents the last matched rate in the 5 Year Income lending market as at 10am, 9 September 2019. Rates are not set by RateSetter and are subject to supply and demand of borrower and investor funds in each market.
* The Provision Fund is not insurance or a guarantee.
Read the Product Disclosure Statement before investing. Past performance is not a reliable indicator of future performance. Capital is at risk This information does not constitute financial advice and investors should consider whether it is appropriate to investors an investor’s circumstances before investors act in reliance on it. Any opinions, forecasts or recommendations reflect the judgement and assumptions of RateSetter as at the date of publication and may later change without notice.
RateSetter Australia RE Limited ABN 57 166 646 635 holds Australian Financial Services Licence 449176 and Australian Credit Licence 449176 and is a member of the Australian Financial Complaints Authority (AFCA).