Selecting my first Peer to Peer provider

After identifying the potential candidates to invest my money, the next job was to select one of the four available to me (Money Spot, Rate Setter, True Pillars & Wisr).   Below is my assessment of the four different providers.  I have focused on the following key areas

• How the investment logistics works,
• What are the minimum investment terms
• What are the fees involved
• What is the historical performance

Money Spot – the target market is short duration (up to 90 days) loans.  As such, you don’t fund individual loans but you money is pooled with other investors and you receive an average return on the pooled fund performance.  It also had a minimum $1,000 buy in and six months investment term before you could access your capital.  According to the website the annualised fund return for the June through August 2018 ranged 12.47% to 12.95%.  Fees that are payable are 1.075% Management Fee and a 1.025% Expense fee.

Rate Setter – Has the lowest starting value of $10 has different term options to invest your cash.  You select your risk profile and term and they match you with an anonymous loan.  In the event of a default you may be able to draw on the provision fund to cover your loss.  At time of writing this Rate Setter website indicates the 2018 default rate (Actual lifetime bad debt rate) was 0.37% of total loans issued this year.  According to the website the 2018 returns performance has been 7.69%.  Fees that are payable are a 10% of all interest earn on loans plus interest earnt on your funds waiting to be invested.

True Pillars – Focus on loans to small and medium businesses. Although the minimum investment to open an account is $100, you can bid on a new loan in $50 lots.  The provider has two markets.  The first is to bid on new loans when they become available and the second is to buy an investor’s loan portion they are prepared to sell.  In the platform you see some general description of the business and the purpose of the fund as well as the overview of the Profit and Loss statements and Balance sheets to help you make an informed decision on the company to invest.  There is no provision fund if the business defaults.  According to the website the average rate of return to date has been 12.02%.  Fees that are payable are the first 2% of the interest rate (eg if the borrower interest rate is 10% - you receive 8% on your investment) plus interest earnt on your funds waiting to be invested.  In addition if you on sell a loan portion to another investor, the sale costs you 0.5% of the value.

Wisr – was previously called Direct Money and looks to work similar to Money Spot where your money forms part of a pool.  The minimum term is 36 months and takes 36 months from when you make the decision to withdraw funds paid out over monthly instalments.  According to the website the average rate of return to date has been 7.57% since inception May 2015.  Fees that are payable are an investment management fee of 1.79375% per annum and a fund administration fee of 1.045% per annum. 

I’ve summarised these in the table below for ease of comparison including links to the respective provider performance pages so you can check out their current stats. 

Provider	Fees	Min Investment Term	Historical Performance
MoneySpot	1.075% Management Fee 1.025% Expense Fee	6 Months	12.95% (1)
RateSetter	10% of all interest earnt	1 Month	7.69% (2)
TruePillars	2% of the interest rate offered to the borrow	1 Year or on sell loan	12.02% (3)
Wisr	1.79375% Management Fee 1.045% Fund Admin Fee	36 Months	7.57% (4)

⁽¹⁾ Performance based off annualised July 2018 results

⁽²⁾ Performance based off year to date in 2018

⁽³⁾ Performance based off all loans since June 2016

⁽⁴⁾ Performance based off all loans since May 2015

As an observation, MoneySpot and Wisr work as an investment of a fund meaning that loan risks are worn by everyone while Ratesetter and TruePillars you are invested in individual loans and are subject to their performance.  In these cases it is up to you to create your own diversification to spread your risk.  Just something to be mindful of when selecting your own investment provider. 

As a first pass I ruled out Wisr due to the large capital and longer investment terms.  It was not what I was looking for to test the waters and understand the investment I am making.  As such I’ve also ruled out MoneySpot with its $1,000 starting point. Based on the remaining two providers, I have chosen TruePillars as my first Peer to Peer lending experience.  While both have low entry points, the thing I liked best about TruePillars was that you have good visibility and choice of the loans you are investing into.  That was important to me to help know where my money was going and allow me to feel like I have a hands on approach to where my money is invested.

While I recognise there is a potential diversification risk with investing in single loans, I look the challenge of exploring how easy it is to achieve my own diversification and what other strategies I can implement to minimise the risk.  Now sit back and join us on the highs and lows as this investment journey sets sail… 

Who offers Peer to Peer Lending in Australia

While I’ve found a number of peer to peer lending providers, over half of them are restricted to wholesale or sophisticated investors in Australia. If you are wondering if you fall into this category, it’s unlikely. Typically to qualify, you need to be an individual, company or trust which has at least $2.5 million in assets or a gross income of at least $250,000 per year for the last two financial years. I am looking for peer to peer lenders that are open to retail investors as this is the category I, as do majority, fall into.

From my research the list below is who I’ve found offers P2P Lending in Australia at time of writing this blog. I’ve captured the basics from the respective websites of who they loan money to, who can invest and the minimum investment amounts. The first six on the list are for sophisticated investors only and thus only available to those who meet the criteria above. The last four are available to retail investors which is anyone over 18 years old in Australia with money to invest.

P2P Provider	Loans money to	Investors	Min Investment Amount
Banjo Loans	Business	Sophisticated	Not provided
BigStone	Business	Sophisticated	$1,000
Harmoney(1)	Personal	Sophisticated	$2,000,000
MarketLend	Business	Sophisticated	Not Provided
SocietyOne(2)	Personal & Business	Sophisticated	$100,000
ThinCats	Business	Sophisticated	$1,000
MoneySpot	Personal	Retail & Sophisticated	$1,000
RateSetter	Personal & Business	Retail & Sophisticated	$10
TruePillars	Business	Retail & Sophisticated	$100
Wisr	Personal	Retail & Sophisticated	$10,000

⁽¹⁾ Harmoney indicate that when their retail investment licence is sorted, min investment will be $500. I’ve registered my interest and will keep you posted.

 ⁽²⁾ SocietyOne have indicated they are looking into opening up to Retail investors. I’ve registered my interest and will keep you posted. 

In my next blog I will be taking a closer look at the MoneySpot, RateSetter, TruePillars and Wisr to understand what they offer and how I selected my first P2P provider to invest in.

Risks of Peer to Peer Lending?

The biggest risk that stands out for me is if a borrower fails to pay back the loan.  If it’s just late payments then you are delayed in receiving your capital and interest returns.  However if the borrower defaults, you capital is at risk.  Depending on if the loan was secured or unsecured and what protections and procedures are in place regarding debt recovery with your investment platform you may lose your money in that loan.  Some platforms have a provision fund to help cover defaults, but this money is not set up for free.  It comes by reducing the interest you receive from your investment.  From the Product Disclosure Statements (PDS) I have read, it is also not guaranteed that losses will be paid of any provision fund a provider may hold.  It is also important to note that money invested into Peer to Peer lending is not considered a deposit and thus not covered under Australian depositor protection laws.

In my opinion, the best way to minimise the risk of default is to diversify into more loans by reducing your loan size into each loan.  Depending on the platform it could be as low as $10 into in a single loan.  Note loans will have different risk ratings with risker loans (unsecured or the low credit ratings) typically have a higher interest rate to compensate for the higher risk of default. 

In Australia it is worth checking if the provider has an Australian financial services (AFS) licence.  This can be checked on the online at Australian Securities and Investments Commission.  This is important as it ties in with their legal requirements on responsible lending of credit.  It means they credit assessments have a minimum standard to be meet and helps reduce the risk of loan default. 

It is also important to note that credit assessments are only a snap shot in time when the application is first made for the loan.  Future circumstances may change which could affect a person’s ability to pay back the loan.

Another important risk from a personal point of view is that money invested should be considered fairly illiquid, as you are essentially providing capital for the life of the loan.  Each provider is slightly different in how it works, so it is important to know what you’ve committed to.  Some providers offer the ability to sell your remaining loan investment to other investors but again you need to check if the provider offers this and what the terms are.  In the case of the ability to sell you loan portion, you still need a willing investor to buy out your stake in a loan for you to receive your capital. 

What happens in the event of the provider going out of business?  Although I see this as a very low risk, it needs to be considered.  Each provider might have a slightly different way of handling it so it is important to have a read through the PDS to understand how it will be dealt with in that unlikely scenario. 

While I’m sure there are other risks, these are the main ones I’ve identified in my journey to date.  I’ll continue to compile these and share them as I go along.  As always historical performance does not guarantee future results.  Keen to hear what other risks people have identified. 

What is Peer to Peer Lending?

Before you start investing in anything, it is important to know what you are getting into.  For me it was about understanding what was peer to peer lending (P2P lending) was before making the decision to invest.  Below is my interpretation of what P2P lending is and how it works.  Explaining it to my wife the first description that came to me was it was like crowd funding a loan which is paid back with interest.

Put simply P2P lending at its core is people who have money, lend to people looking to borrow.  This is facilitated through a financial service provider (also known as a market place) which matches a borrowers request to willing investor/s prepared to fund the loan.  I’ve represented this relationship in the diagram below. 

Basic concept of Peer to Peer lending

Each month (or whatever the agreed payment frequency is) the borrower pays back principle and interest to the investors via the market place facilitator.  This is an oversimplification of the process so let’s go into a bit more detail of each of the three players: the borrower, the financial service provider and the investor.

The Borrower – This one is straight forward.  It is anyone from an individual to a company wanting to borrow money.  They approach the financial service provider instead of going to a traditional bank and apply for a loan.  The application process from here is the same with credit checks etc.   Once money is borrowed, it is paid back over the agreed time frame via principle and interest repayments as until fully repaid.

The Financial Service Provider – The financial service provider facilitates the loan.  They essentially run the logistics similar to a bank.  Items they cover off on are credit assessments to determine the suitability of the borrower and their ability to afford the requested loan, where its secured or unsecured, setting an interest rate based on the risk, handing the legal side setting up loan contracts etc.  On top of the general bank-like functions, the financial service provider links up investors who are prepared to fund a portion of the loan and handles the transaction of all money from the initial disbursement of the loan to the borrower and all repayments from the borrower to the investors for the life of the loan.

The Investor – The investor can be anyone from a company, trust or individual.  The list of people who can invest varies from different market place financial service providers with some restricted to essentially high net worth individuals / companies.  An investor can lend as little as $10 towards a loan, but again the minimum contribution amount varies depending on the provider.  Depending on the size of the loan there are potentially hundreds of investors contributing differing amounts to a single loan.

So why would people use Peer to Peer lending?

From a borrower’s perspective, they may achieve a lower interest rate than a traditional bank may offer.   On the flip side an investor may receive better returns on capital then cash in the bank, term deposits or other forms of investment.  The market place financial service providers make their money out of this typically through taking a cut of the interest the borrower pays over the life of the loan and potentially also loan establishment fees paid by the borrower.

I hope this has given you a better insight as to my understanding of peer to peer lending and how it works.  As with any investment, there are risks involved, my next blog will aim to breakdown what those risks are.

Humble Beginnings

I’m Pete and this blog is based around my journey into investing in Peer to Peer (P2P) Lending. I’m just a regular person with a day job like everyone else in an unrelated field. What got me interested in P2P Lending is diversification. We all have exposure to shares though our super, property is expensive and this is a different way to gain financial investment diversification. I’m starting from a zero base in that I’d heard of it but didn’t know anything about it. Chatting to people, I found many had not heard of or knew very little and no one had any investments. This got me onto research path to find out more about P2P lending and making my first investment into the alternative future of finance.

I’m starting this blog to share my learnings and experience as a newbie embarking on this innovative frontier in the hope that what I’ve learnt and found helpful to know, maybe of benefit to others. It is intended to break down the barriers that I faced as a new comer to the P2P space.  

To kick things off my first few blogs will aim to cover off on the basics of what is P2P lending, how it works, who I’ve found offers P2P Lending investment in Australia and selecting my first P2P investment platform.

As time progresses I intend to dabble in more platforms, share my experiences, thoughts on the pros and cons and my investment strategies to try and maximise returns on investment. It’s by no means financial advice, but hope it is educates people enough to start their own research and investment journey so.

As I go along this journey I’m open to feedback and comments to grow and learn. Also please don’t be afraid to share your own thoughts and experiences, as collaboratively we can learn together.