Peer to Peer Lending – Goals and Questions
Continuing on from my first post about Peer to Peer (P2P) Lending, I wanted to have a look at the three remaining retail P2P lenders. As I am still a retail client, the wholesale funds hold little interest to me at the moment. As a quick recap, the three remaining peer to peer lenders are:
Before assessing the remaining three however, there are some key questions that need to be answered. Some of them can’t be answered, like “will I lose my money”, but I will try and see if some of the information they provide in their documentation can provide comfort. As with most things in life, I like to start out with the big picture in mind, and work my way into the details.
Before starting on the questions I thought it would be best to clarify what my actual goals are for this. Why am I looking at peer to peer lending in the first place. So goals seemed like a good place to start.
Peer to Peer Goals
I have two main goals for my peer to peer investment. Unfortunately they are almost mutually exclusive. The reason for that is that I am coming at this from two different angles. Firstly, I want to achieve better returns than I am getting at the banks with high interest savings.
Goal #1: Obtain a safe and low risk higher interest rate than the banks are providing.
This goal is sort of a logical step after savings. Once you realise the currently low interest rates are not doing it for you, you need to look elsewhere. Currently I have looked at he share market, property (although not all avenues), non-government bonds, and now my attention has turned to peer to peer lending. So in some ways, I view this goal as yet another non-government bond.
My second goal, lends itself much more to the other end of the spectrum – my X-Factor investments. I want to be able to obtain higher returns without increasing my risk by as much as those returns require elsewhere.
Goal #2: Obtain a higher return while maintaining the risk at a comparable or lower level than similar investment returns.
One side benefit of peer to peer lending is that the returns are often at a fixed, or close to fixed, rate. You therefore know the rough return you are getting (if all goes well) before you pull the trigger. The share market (other than perhaps dividend investing) is almost the opposite. As super funds state regularly: “Past Performance Is Not Indicative Of Future Results”.
Peer to Peer Questions
Now that I have my goals set, I need to have some questions or metrics to help assess the information provided and allow me to better assess the returns, and risk. The returns should be reasonably simple here, as I expect all three retail lenders will be offering either a set rate or small range of rates for each loan category. These could be fixed to the RBA cash rate, or a rough point in time guide, but will still offer numbers.
The risk, on the other hand, is going to be harder to assess. I am not using any formal risk assessment methodology other than the standard high level impact and likelihood. Some of the key inputs that will help are: how much of my money I could lose, and how often can I expect that to happen.
- What rate of return will I receive?
- How long will my funds be tied up?
- What is the minimum investment?
- How long has the company been around?
- How many investors are already using the platform?
- How do they handle late payments and defaults?
- What recourse do I have if my money is not repaid?
- How much choice or control do I have over the loans my money funds?
- How do they rate loans?
For the risk scale, I will be using the following matrix. It is an extended 3×3 matrix where the first 3 items are equivalent to low, medium, high, and the 4th is a “almost none”, as I kept finding the 3 level scale slightly too restrictive. I have attempted to use a mix of rough quantitate as well as qualitative measures for these. I guess I will see how well my questions map onto it.
The labels I have used are rough – e.g. you will see there is no 1 year or 4 years; and it is not clear where a 75% or 20% loss would fit in. This is intentional as experience has told me that your results are only as good as the data you put in. Given the data will be rough at best, I did not want to give the impression that I could tell the difference between 4 years and 5 years, or 30% and 50%.
My next post will look at the answers to these questions, and then assess where each of the three peer to peer lenders stands in the risk matrix and in relation to my two goals.