Peer-to-peer lending has been around in the USA since 2006. The year Lending Club started up. It took several more years before P2P came to NZ in 2014. We’re always a little bit behind the rest of the world.
This means that P2P lending is a relatively new concept, only just 4 years old. As such, many people are still somewhat suspicious or dubious about it. And this suspiciousness can be a good thing.
You should always be suspicious about any new investment opportunity. It just means that you need to do more research before you convince yourself that the investment is worth the risk. Or to confirm that it is not a scam
What is Peer-to-Peer Lending in NZ?
Peer to peer, in general, is a method of connecting individuals with a service or product, to other individuals who need that service or product. This makes the product or service cheaper, as it removes the middleman (or middlewomen) involved in the transaction. Lowers the price of doing business.
There is still a middleman involved though. The platform that connects buyers and sellers are essentially middlemen, and they will take a small cut on every transaction. This cut is smaller than the traditional middlemen. The peer to peer networks generally operates online. This makes it cheaper than the traditional brick and mortar businesses. They can be based anywhere.
Peer to Peer Lenders operating in NZ Today
Peer-to-peer is a big thing amongst millennials. There is peer to peer platforms for accommodation, Airbnb, for transport, Uber. These are the fashionable mainstream peer to peer networks.
There are even several New Zealand peer to peer networks starting up, such as Anyspace.
But the idea of P2Ps has been around a lot longer than these companies. The first P2P was a file-sharing system, like Napster, for sharing music, back in 1999. Other applications of P2P are things like digital cryptocurrencies (Bitcoin, etc).
Anything with a middle person taking a cut can be optimised using a P2P network. The one that I would love to see P2P make a big difference in is Real Estate sales. The middlemen in real estate take a huge cut of up to 4% of the value of your house when they sell it.
And I have just found out that in the USA, there is a buyer’s agent, and seller’s agent, as well. Both agencies taking a cut! Wowzers
Peer to peer lending in New Zealand
So now to Peer to Peer lending. Where people with money to invest can give it to people who need to borrow money.
P2P lending consists of a platform that enables borrowers and investors to connect. And there are benefits in doing this over the traditional brick and mortar money lenders.
For the lender- you can earn high-interest rates on your investments. Interest rates from 7% upwards. Which is a great rate in today’s interest climate.
For borrowers, the benefit is that they generally get a better interest rate than some of the larger money lenders.
So theoretically everyone wins- except the institutional money lenders.
Risks of Peer to Peer Lending in NZ
I’ve had several friends ask about investing in P2P lending. They all tend to think that it is too risky.
And they are right- there is more risk associated with P2P lending than say putting the money in the bank. You could lose all your money if the lender fails to repay the loan.
But- in reality- what investment doesn’t come with risk?
They all do! No investment was risk-free.
What you really need to do is to weigh up the risk to the benefit- the interest rate earned. The bank interest rate is below 3%, and P2P is above 7%.
To minimize the risk associated with P2P lending, they advise that you lend to multiple borrowers. Rather than lend all your investment to one. This is a type of diversification. Although there is nothing in the regulation to say that you can’t lend all the money to one lender. It’s just not advisable.
Peer to Peer Lending in NZ
To become a P2P in NZ you have to apply for a licence from the Financial Markets Authority. They regulate the industry. It is interesting to read the regulation, as there is nothing in there to limit the size of the loan a P2P can lend to a borrower.
There are currently five companies offering P2P in NZ. Each has different fee structures, offer unsecured and secured loans, and each has different fees structures.
Update (2020) Harmoney doesn’t offer peer to peer to retail investors anymore
Harmoney
Harmoney is the biggest P2P network, to date, they have lent more than $800 Million. They started in 2014.
Harmoney has both personal and institutional investors and lend to personal customers. They break each loan into $25 lots. All loans are unsecured and the terms are either 3 years or 5 years.
To start the minimum investment is $25.
They charge a service fee on the gross interest charged and depends on the size of the lenders total outstanding principal. The fee on grows interest charged is 15%, 17.5%, and 20%.
Lending Crowd
Lending crowd started in 2015.
They cater to both personal and institutional investors and lend to personal and business. Their loans are secured through assets like property or vehicles. They break each loan down into $50 lots. Terms are up either 3 or 5 years.
To start with Lending Crown the minimum investment is $500.
Lending crows also charge a fee on the gross interest collected. Their fee is more modest than harmony at 10% of gross interest collected, regardless of the size of the lender’s outstanding principal.
Squirrel Money
Squirrel Money started in 2015 as well. They were the second company to offer P2P in NZ.
They are more true to the P2P principles by only letting personal investors lend to personal borrowers. Their loans are both secured and unsecured. Loans are not broken into lots, rather you have to lend the full loan amount. They offer 2, 3, and 5-year terms.
The minimum required to start with Squirrel is $500.
Squirrel Money uses a fee charged on the gross loan repayments and ranges from 0.95 – 2.95% p.a. of gross loan repayments made, depending on loan risk grade.
Zagga (Lend Me)
Zagga, which was first called Lend Me, started in 2015. A side project for an Auckland based law firm.
They have both institutional and personal investors and loan to businesses and individuals. Their loans are secured and they break each loan into $1000 lots. They match investors risk level to borrowers credit profiles. Terms can range but are limited to 5 years.
To start with Zagga you need a minimum of $1000.
Zagga charges fees based on the outstanding loan balances. Their fee ranges from 0.9 – 1.95% p.a. of the outstanding loan balance, depending on loan risk grade
Southern Cross Partners
Southern Cross Partners is the youngest of the bunch starting in 2016.
They offer property secured loans to personal and commercial property backed by personal and institutional investors. Basically, more of a peer to peer mortgage lender rather than P2P loans. They break loans down into fractional lots.
They have a step minimum investment of $10,000
They don’t charge any percentage fees, just a flat $175 yearly fee if you want to sell off your loan into the secondary loan market.
As you can see the fees charged for P2P lending are different from the more simple fees charged for index funds. Some charge fees on the interest received, another charge on the basis of outstanding loans, or on the repayments being made. Either way, it looks like they take a bigger cut than the index funds.
My experiment with Peer to Peer lending in NZ
I get so many questions about P2P because I started using Harmoney and Lending Crowd pretty early on- April 2016 to be exact. And I still use them today. Although the returns are slowly decreasing from when I started.
I have investments both with Harmony and Lending Crowd. They have both been returning above 11% and I have only ever had 4 defaulted loans. Below is my returns over time from my Harmony account.
My lending crowd account has just dipped to 11.3%. Which has been an all-time low.
So which P2P is the best
So which do I like the best? Well, I can only compare harmony with Lending crowd as I have had no experience with the others.
Harmoney does have the better platform. They track historical performance, show all your portfolio details in a good dashboard, allow for automatic lending based on your own lending rules.
The downside is that there are more investors on the platform than borrowers. So any loan that is listed does not last long. This makes it difficult to actually invest in loans. And it has become more difficult in the last few months when they started to prioritise institutional investors over personal investors
Lending Crowd has a similarly good dashboard, but lack the historical returns data so that you can track your portfolio over time. They also struggle with too many investors and not enough borrower. Loans being snapped up in a matter of minutes.
They also have no automatic lending system. Rather they email you to tell you a new loan has been listed. At which point you need to log in as soon as possible to have any chance to invest. Which leave you no time to read any details about the borrower.
Final words on NZ Peer to Peer Lending
Peer to peer investing can seem like a good investment option for decent returns over the long term working and can be used as a part of your investment strategy to become financially independent.
Because P2P is new I think the risks associated with it are blown out of proportion. I have personally lent more than $40k+ and only had $122 default, although I do have 23 loans that are currently in arrears. But having lent more than 800 times, that 23 in arrears isn’t a lot.
Although I have been getting more and more frustrated with the fact that by the time that I log on all the loans have already been fulfilled. So P2P investing is not a passive investment vehicle.
And for that reason alone, I have started to pull funds out as loans have been paid back out of P2P and investing them in passive index funds instead.
Let me know if you have had any experience in NZ Peer to Peer lending. I would like to know what you think of the P2P lending fad.
Update on NZ Peer to Peer Lending
I’ve continued to invest in NZ Peer to peer lending from 2016 to today. I have invested in both Harmoney and Lending Crowd. My experience has been good. My net annual return for Harmoney has been sitting around 10%. And my annual return for Lending Crowd has been sitting around at 11.5%. Check out my annual summary- Lessons learned after one year of Investing.
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I don’t know whether I have got this right, but this kind of reminds me of dragons den, where you invest in ideas. It seems that you do have a choice to say yes or no to who you lend to which is great. Just a shame that the window of opportunity is small.
Peer to peer is interesting. and quite like dragons den. You get a financial sheet of who want to borrow the money, and what they want to spend it on. When I first go into it I was looking for higher returns on my money. Once I started looking into index funds and figured they had similar returns, and probably less risk of defaulting, I started investing in that instead. I have been slowly removing money out of peer to peer.
It is strange- on the one had I don’t think anyone should get into debt if they can managed to avoid it. And on the other had peer to peer offers people loans with lower interest than the finance companies.
I have an experimental amount in harmoney. Did you notice the sudden drop off in A class loans, Rohan? That was because Heartland wound up buying a stake in this lender. A stake which let them take all the top tier loans before they even hit the market. Bugger for Harmoney lenders.
I actually wound up buying Heartland shares(not specifically for this reason). Now I benefit, by extension, from Harmoney with a fraction of the risk and all the added benefits of a growing market share and the backing that comes with a large asset pool added by Heartland.
Just some food for thought. Great post, btw. You must be doing alright out of Harmoney to invest 40k into the platform! Good on you. Keep building that snowball!
I did notice that, and ever since then I haven’t been able to fund loans. I have been pulling out extra money and investing it in index funds as it just sits in my Harmoney account. My interest in peer to peer lending has definetly gone down. Lending Crowd is similar, with all the good loans being snapped up in a few minutes. There is too much competition to fund the loans and you don’t get enough time to even consider the borrowers situation before the loan has become fully funded.
Who do you buy your shares through by the way?
I use asb online brokerage. Easy to use, can track your portfolio, linked to my account, low fees. How about you?
Haven’t really bought any individual shares at this stage. Last time I checked it cost $30 per transaction and thought it was too high unless you have a pile of cash already saved to invest. I have been drip feeding into index funds using invest now at the moment.