Peer-To-Peer Lending e.g. RateSetter

Ever considered P2P lending?

Banks make a lot of money in the Personal Loans (non-credit card) space, charging more than 10%pa, and the Credit Losses on these loans are quite low because unlike payday lenders they target credit-worthy individuals.

Interest *might* be tax-deductible if money lent is made through a home loan redaw.

What do you think?

 

If you make a million loans, you can expect a small % (say, 10000) to go bad. If you make five loans, how do you know they are not five out of the 10000? one default is a huge hit to your returns.

 

true, that's why there is a Provision Fund (loss pool) to absorb losses and 'diversify' that risk from many loans and spread it across all lenders.

 

That helps, but looking at their webpage. 126m loans outstanding. 7m in the provision fund. 4m estimated bad debts.

Fine in a good economy. In a recession..........

 

I did consider this. However I found the borrowers strangely familiar to the type in the USA with sub prime mortgages around GFC time

 

LOL I think that applies to almost all other asset classes as well, such as shares and even property (I'm looking at you Perth market), not just P2P lending. It's a risk-return trade-off.

 

Given the banks are charging @14% for an unsecured loan I think this is a good option for both borrowers and lenders.

I've put some play money into a 5 year income loan at 8.8% return.

 

The rates are not as great (for return as investor) around 4.5%-5% at the moment. Not ideal. I did play with it a bit on monthly lending. Was ok. Sometimes borrowers are a few days late in repaying.

 

I think you gotta commit to 5 years to get 9% return etc, they will pay P&I, but there's a risk of Early Repayment which could be a good thing or a bad thing. Of course there's the credit risk (but mitigated by the Provision Fund).

You could see 3% after-tax return if you recycle through a home loan redraw and make it deductible.

 

Yep. But that means you are taking the risk of missing on prospect of rising interest rates. And if interest rates do rise in 2018 the 3% after tax or 5% gross wouldn’t cut it.

That market is very sensitive. I have seen, and taken advantage of 5.7% (monthly lending, rates annualised) when there was talk of RBA increasing the rates. If they actually do go up chances are the rates will be materially higher on the peer to peer platform.

Nothing wrong with using these platforms. But I would rather get a 3.9% risk free return from TD, then lock my cash for 5 years with higher risk and large chances of rates going north during these 5 years.

 

I've been using it for about 12 months now, have 10% of my non property investing money in it. Doing well so far, only in the 3 and 5 year markets. No loan defaults and I just let it Auto re invest and build up and I haven't put any additional funds in it for about 4 months. I just see it as different investing method.

 

I guess the biggest risk outside credit risk is the interest risk. If you're locked in to lend fixed for 5 years and the funds used were redrawn from your variable loan, your after-tax margins could erode. This is true even if you're not redrawing, because there's the opportunity cost of not being able to lend it at higher rate when personal loan rates go up. But it's like Term Deposit anyway, with a higher return and a twist.

 

This exactly what I meant!

 

But if you're earning 5% above the TD rates, you would be mad to be thinking interest rates would go up 5% in the next 5 years?

 

5% in 5 years is not impossible.

 

You know what my tax rate will be?

 

I wonder if they would ever allow a secondary market for the loans - for example where you could sell a 5 year loan early, etc?

 

I do think this is a good idea, a potential disruption to the whole industry if done right. The problem is going to be where (when) loans go wrong.

 

Isn't that the case with most asset classes including property, shares and even gold? They could also go wrong.

I guess it depends on people's risk-reward appetite and risk-mitigation technique (diversification, loss pool provision fund, cash liquidity buffer, interest rate match-funding, etc)

 

Well it's assuming it's the median 37% + medicare levy. Or that's what I thought.