Peer to Peer Lending – Goals and Questions Answered
So it has been a while since my last post. I feel bad, but will get over it since no one complained to me.
I wanted to give a quick update on my P2P lending from the last post that I made on the topic. I also wanted to answer/address the goals and questions I had previously. So here goes.
First, let’s address the questions
- What rate of return will I receive?
- How long will my funds be tied up?
- This question did not worry me too much, as I am investing using an SMSF, so timeframe is not too much of a concern.
- What is the minimum investment?
- Wisr: $10,000 last time I checked.
- RateSetter: $10.
- OurMoneyMarket: $50.
- How long has the company been around?
- Wisr: October 2014.
- RateSetter: November 2014.
- OurMoneyMarket: Lending since Aug 2017.
- How many investors are already using the platform?
- Wisr: Lots.
- RateSetter: Lots.
- OurMoneyMarket: 46 but growing.
- How do they handle late payments and defaults? and…
- What recourse do I have if my money is not repaid?
- Wisr: (the $10,000 minimum was too high for an initial test of P2P, so I did not investigate this further).
- RateSetter: None directly. RateSetter will normally either use their provision fund to pay you or try and get the payments from the borrower. They can also on sell the debt. While not a guarantee so far they claim that every lender has received every dollar owing to them.
- OurMoneyMarket: Bad luck.
- How much choice or control do I have over the loans my money funds?
- Wisr: None.
- RateSetter: None.
- OurMoneyMarket: Control over loan grade.
- How do they rate loans?
- Wisr: n/a.
- RateSetter: n/a.
- OurMoneyMarket: A+, A, B, C, D.
Second, revisit the goals
Goal #1: Obtain a safe and low risk higher interest rate than the banks are providing.
Goal #2: Obtain a higher return while maintaining the risk at a comparable or lower level than similar investment returns.
The key to both goals is safety and low risk as all 3 of them were providing better rates than banks, but none of them come with the Authorised Deposit-taking Institutions (ADI) deposit guarantee.
One of the key risks to a small investor (like me) is what I am calling return volatility. Large banks have hundreds of thousands of loans. This means that if the expected 0.1% (or whatever rate the bank is comfortable with) of loans go bad, they lose 0.1% of their 100,000 loans or 100 loans.
However I am only planning to invest up to $10,000 initially, or less than 1 average sized loan on many of the platforms. So if 0.1% of my loans go bad… it should be 0! Yay! But what if it isn’t? I lose $10,000?
This is why the platforms either group all the money together, or allow you to invest small amounts. They are trying to give to the same loss impact as the banks.
With RateSetter and OurMoneyMarket, I don’t want to have to splice my money up into $10 or $50 chunks and create 1000 or 200 smaller loans. Even if I did, I still don’t have anything near the 100,000 that larger banks have.
With Wisr, they pool all the money and you buy units in the loans they have. Those units provide return. Nice and simple and it means the risk of individual loans going bad is distributed across everyone.
So where does that leave me?
This is where the RateSetter provision fund comes in, and made my decision for me. If there are those one-off but expected lost loans, the provision fund will (probably) cover them. This means that it is really only larger events, where there are large scale defaults that the money I am investing is really at risk (which is the same for all P2P platforms).
So, I can get a better rate of return from RateSetter than from Wisr, with what I believe is a similar risk level. I can also get lower risk from RateSetter than OurMoneyMarket for the same levels of return.
A place for all 3
There is a place for all 3, and here is where I think each platforms strength and weaknesses are:
- Provides simple P2P investment while minimising the risk by spreading it across all investors.
- Provides more control (over the rate, length of investment, market, and how much you want to lend), but also limits the risk of individual loans going bad with the provision fund.
- The only platform that gives you (some) direct control over how much risk you want to take. If you want to try and get a 15% rate of return, this is the only platform that will provide that.
Assuming I get around to another post, I will have a look at how RateSetter has performed for me over the last 5 or so months. Stay tuned!