Peer to peer lending (P2P) is becoming an increasingly popular option to borrow and lend money in Australia. Essentially, peer to peer lending (or marketplace lenders) cuts out the lending intermediaries (such as banks, credit unions or building societies) and connects borrowers looking for a loan directly with lenders through an online platform. While still in its infancy here in Australia, peer to peer lending is very well established overseas, particularly in the United States and the United Kingdom, where globally in 2015, US$50 billion was lent via P2P platforms. The biggest players in the P2P lending platform in Australia are currently SocietyOne, DirectMoney, MoneyPlace and RateSetter.
What is Peer to Peer Lending?
Peer to peer platforms pair lenders (generally, individual investors) with borrowers who meet strict eligibility requirements. In Australia, most lenders have their funds invested in a portfolio of consumer loans, rather than to borrowers. This strategy offers a higher return than most fixed income investments, paid over a set period. Lenders do not lend their funds directly to the borrower; rather, they purchase a managed investment product which sets out their repayment terms and dividends. All P2P lending platforms in Australia must hold an Australian Financial Services License (AFSL) that is issued to comply with the Corporations Act 2001 (Cth).
Risks of Peer to Peer Lending
Lenders should carefully read any disclosure documents and take a credit assessment before lending funds to the P2P platform. If borrowers do not repay loans, lenders and investors risk losing their money, rather than the trading platform. This approach is why there is generally a higher risk of return in acknowledging and taking this risk. Lenders should also conduct their due diligence on the credibility of the lending platform.
One of the biggest risks facing lenders is obtaining accurate information about borrowers. The Comprehensive Credit Reporting (CCR) initiative, which began in 2014, shows a detailed history of both positive and negative credit information about borrowers. Traditionally, credit reports only contained negative information such as loan defaults and late payments. The CCR is voluntary for banks and P2P lenders. In remaining agile, P2P players couple CCR with their technology and due diligence processes to match borrowers with lenders which often results in approvals much faster in the absence of CCR.
Benefits of Peer to Peer Lending
The biggest benefit for borrowers of P2P funds is low-interest rates compared to traditional expensive personal bank loans. Many P2P platforms also do not charge any upfront fees or monthly service fees; however, generally charge fees for the completion of each transaction. Lenders also benefit through P2P platforms due to high yields (through better interest rates) over shorter timeframes. However, most lending platforms require lenders to be sophisticated investors and meet certain eligibility requirements.
The increasing uptake of P2P lending is posing a threat to Australia’s banking sector which has largely been undisrupted. In 2014, Macquarie Bank estimated 30% of annual revenue by major banks could be at risk by P2P players in the long term, equating to $27 billion. In a survey by Morgan Stanley, it revealed millennial bank clients (those born after the early 1980s) are favouring more convenient and cheaper sources of credit and P2P lending is becoming more attractive.
Before you sign up for a P2P loan, make sure you clearly understand the loan documents and the terms and conditions of the loan agreement. Your credit guide is also an important document to review as it sets out who your credit provider is and what your P2P platform operator does. In the event of a dispute, the dispute resolution clause should be clear to avoid any misunderstandings. Our banking and finance lawyers can review and assess loan documents for you. Questions? Call us on 1300 544 755.