How peer-to-peer lending fits into an investment portfolio
Today’s investors face an investment landscape of growing complexity.
In the light of investment volatility and a record low cash rate, many investors are on the hunt for investments that can provide stable, cash returns to their portfolio. That’s where peer-to-peer lending comes in. This innovative investment model provides retail investors with access to the established asset class of consumer credit, helping them earn stable cash returns.
For many years, banks have had sole access to the benefits of this asset class.
Today, peer-to-peer lending is experiencing rapid adoption amongst thousands of retail investors. In April, the Australian Securities and Investments Commission (ASIC) found the number of retail investors as at 1 July 2018 is 79% higher than as at 1 July 2017, and the total number of retail investors has more than quadrupled since 1 July 2016.
So, what exactly is peer-to-peer lending and how does it fit into an investor’s portfolio?
What is peer-to-peer lending?
Broadly speaking, peer-to-peer lending uses technology to match borrowers with investors. By using clever technology and eliminating the operating costs associated with maintaining ‘bricks and mortar’ institutions (such as banks and credit unions), peer-to-peer lenders can pass the savings on to customers in the form of more competitive interest rates for borrowers and better returns for investors.
Platform operators, such as RateSetter, assumes responsibility for the following functions:
- Assessing the creditworthiness of loan applicants, by rigorously evaluating a borrower’s credit history, employment status, credit score
- Managing the loan lifecycle including establishing loan contracts and facilitating payments between borrowers and investors
- Managing each investor’s portfolio
Investors enjoy the economic benefit of the loans to which their funds are matched, which means that they receive the borrower payments of principal and interest each month, but may also suffer losses if a borrower to whom their funds are matched fail to make timely repayments or default on their loan. Some peer-to-peer lending platforms, including RateSetter, may offer a form of protection against losses, through a ‘Provision Fund’. This is a pool of funds, held solely for the benefit of investors, that can compensate investors in the event of borrower late payment or default.
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