Peer to peer lending

Peer to peer (P2P) lending matches people with money to invest and people looking for a loan.

What is peer to peer (P2P) lending 

P2P (or marketplace) lending lets someone needing a personal or business loan borrow money from an investor. Instead of going through a lender such as a bank, building society or credit union.

The borrower takes out a loan — and repays it over time, with interest.

When you invest via P2P lending, you buy a financial product. This is typically a managed fund.

Make sure you understand how the investment works. Consider whether it suits your needs and goals before you invest.

How the P2P lending platform works

A P2P lender operates an online platform. The platform operator acts as intermediary between investor and borrower. It makes money by charging fees to both.

As an investor, P2P lending may offer you an attractive interest rate. The rate, and how the platform operator calculates it, can vary.

You decide how much money you want to invest.

Depending on the lending platform, you may be able to decide how your money is used. For example, you could choose to fund a particular loan. Or invest in a portfolio of loans. You may also be able to choose the minimum interest rate, and a loan period to suit.

Alternatively, the platform operator or fund manager may make the investment decisions.

The platform operator collects borrower repayments and passes them on to investors at set intervals. You may get your capital back via repayments, or at the end of the loan period.

When a borrower applies for a loan, the platform operator does a credit history check. The platform operator assesses lending risk and repayment capacity.

The platform operator looks after the privacy of platform user information.

Pros and cons of P2P lending

Pros

• Interest rate — may offer a higher rate of return, compared to some other types of investing.
• Accessibility — an online platform can make transacting easy and accessible. The idea of your money going to someone needing a loan, while making money yourself, could also appeal.

Cons

• Lending risk — many P2P loans are unsecured. The platform operator may not disclose the lending risk of each borrower. If the operator doesn't lend any of their own money, the lending risk is on you, the investor. You could lose some or all of your money even if you invest in a 'low-risk' loan.
• Assessing credit risk — how the platform operator assesses a borrower's ability to repay can vary between platforms. The result may be less robust than a credit rating from an external credit reporting agency.
• The borrower may fail to repay the loan — borrower circumstances can change. For example, illness or unemployment may mean they are unable to keep up repayments. In such a case, the borrower can apply for a hardship variation. So the size or timing of repayments could alter. If the loan term extends, you may get a lower return than expected.
• No government protection — investing via P2P lending is not like depositing money in a bank. There is no government guarantee on funds. For example, if your investment is lost due to fraud or a lending platform error, you may have no option for compensation.
• Adequacy of compensation — even if an operator sets aside funds to compensate investors, there may not be enough to compensate everyone.

What to check before you invest 

Check the platform operator is licensed

Make sure the platform operator has an Australian financial services (AFS)licence

Search the following two lists on ASIC's Professional Registers Search:

• Australian financial services licensee
• Australian financial services authorised representative

To search, choose the list name in the 'Select Register' drop-down menu.

If the operator isn't on one of these lists, it could be operating illegally.

Check the managed fund is registered

A P2P lending platform is typically a managed fund (managed investment scheme).

Check the fund is registered with ASIC by searching on ASIC's Professional Registers Search. To search, choose the list name in the 'Search Within' drop-down menu.

An unregistered managed fund offers fewer protections than a registered fund.

Read the product disclosure statement

Get the fund's product disclosure statement (PDS) before you invest. This sets out the features, benefits, costs and risks of the fund. Make sure you understand the investment.

Check the fund's features

Use these questions to check the features of the fund:

• Security — Are loans secured or unsecured?
• Interest rate — How is the interest rate set? Who decides this?
• Choice of loans — Can you choose a specific loan or borrower? Can you invest in several loans or borrowers, to reduce the risk of losing all your money?
• Repayments — How long will it take to get any money back?
• Getting your money back — Do you have cooling off rights, if you change your mind? If so, can you get your money back?
• Risk assessment — What is the operator's track record of assessing borrower risk? For example, a high number of defaults or late repayments may indicate a poor credit assessment process.
• What if the borrower defaults — How will the operator recover your investment? Who pays the expense of any recovery action?
• What if the platform fails — What happens if the operator becomes insolvent or goes into external administration?
• Fees — What fees do you have to pay the operator? For example, to invest, handle repayments or access your money early.

Consider whether the fund suits your needs and objectives before you invest.

Problems with a P2P platform

If you're unhappy with the financial service you've received or fees you've paid, there are steps you can take.

Talk to the platform operator

First, contact the platform operator. Explain the problem and how you'd like it fixed.

Make a complaint

If the operator doesn't fix the problem, make a complaint to their business in writing. See how to complain for help with this.

P2P lending platforms vary. Talk to a financial adviser if you need help deciding if this investment is right for you.