P2P lending: What is it and how does it work?

Peer-to-peer lending (P2P lending) is a relatively new form of investment in Australia, so to explain the concept and how it actually works, we’ve (nestegg.com.au) enlisted the help of one such platform’s CEO.

According to John Baini, co-founder and CEO of TruePillars, P2P lending occurs where a central platform acts effectively as “an introducer between parties that want to borrow money and parties who are looking to invest and earn a return”.

P2P lending effectively sees the platform operator “disintermediating” a loan which is then required to be paid back to the investor with interest.

Mr Baini explained it as “cutting out the middle man” that in this case would normally be a bank.

“Banks use deposit funds to fund loans or even borrow money to fund loans and the outcome of which is that the depositor gets quite a small return, whereas the bank is taking a lion’s share of the interest that those borrowers are paying,” he said.

“What a peer-to-peer lender does is effectively cut that step out and allow the bulk of the interest borrowers are paying on loans to flow through to those investors.”

For the CEO, “that’s clearly the positive point of difference, so the return is therefore greatly enhanced”.

The advantages also flow through to the businesses and companies who go to TruePillars to take out a loan, Mr Baini also highlighted.

“The main advantage for businesses is we are a lot more attentive and a lot faster in response to their lending needs,” the CEO said.

“Small business lending is one of the more complicated forms of lending because the information surrounding small businesses is quite imperfect.”

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