Generation Rent Investment Guide episode 3: Peer-to-peer lending platforms compared

By Jenée Tibshraeny

Peer-to-peer (P2P) - we are all over it when it comes to transport and accommodation, but what about finance?  

The idea is lenders and borrowers are matched according to their risk/reward profiles through online platforms licensed by the Financial Markets Authority.

In other words a borrower makes a loan application with the P2P platform. If the platform approves the loan, they allocate it an interest rate that reflects its risk.

An investor then comes along and chooses whether they want to invest in higher risk loans with higher interest rates, or lower risk loans with lower rates.

Most platforms allow investors to spread their risk by only funding parts of loans.

Over a half a billion dollars of loans have already been written through Harmoney - the first P2P lending platform to launch in New Zealand nearly three years ago.

It’s attracted institutional investors such as TSB Bank, which has lent $50 million through the platform to date.

The other four platforms in the market have collectively written nearly $77 million of loans.

P2P lending is growing too fast for it to be ignored by those interested in investing in the debt market.

THE BIG PICTURE

Knowledge deficit

As a financial journalist (not a qualified adviser), I believe the concept is great. It’s simple, cuts out the middleman, and gives those with smaller amounts of money an opportunity to earn pretty good returns.

Yet my concern lending your money directly to someone through a P2P platform, rather than indirectly through a bank for example, lies in the very appeal of the idea.

I like the notion of being able to choose who you invest in, rather than leaving this in the hands of a big institution.

The pinch is, you don’t have access to nearly as much information about the borrower as your bank does before it parts with its money.

Rather, you are trusting the P2P platform has done its due diligence on the borrower, and has a robust system that accurately prices their risk.

If bankers have been accused of giving people without enough income or the right documentation mortgages, how do we know P2P lending platforms aren’t peddling debt to the wrong people?

Low hanging fruit

P2P lending platforms are already largely targeting borrowers who can’t get bank loans. What do you think someone’s credit history must look like if they’re made to pay 39% interest on a loan?

To add to this, being new to the market, P2P lending platforms aren’t regulated to even nearly the same extent, and don’t need to make the same disclosures, as banks. History would show that by the time regulators get their heads around the loopholes of a new scheme, the horse has bolted.

I can’t deny the fact that many of those who have invested in P2P lending platforms over the past few years have been enjoying returns in the double digits, but my guess is they will be among the first investors to take a hit when there’s an economic downturn.

In other words, the person who is paying 30% interest on a car loan is likely to be first to default on their loan when the going gets tough.

Sure - every investment has its risk and those who invest in property or the share market will also be burnt in downturns.

The difference is property and shares have always recovered long term. P2P hasn’t been around long enough for us to know how it will weather the storm.

Nonetheless, the risk could be worth the reward, provided you have a diversified investment portfolio.

HOW IT WORKS

With this critique of the concept in mind, I have looked into the five P2P platforms in the New Zealand market in the third instalment of my Generation Rent Investment Guide series.

Different platforms have taken slightly different approaches to carving their own niches in the market.

  Harmoney Squirrel Money Zagga Lending Crowd Southern Cross Partners

Who

Part owned by founder and CEO, Neil Roberts (40%), Trade Me (14%), Heartland Bank (13%) and others. Part of the Squirrel brand founded in 2007 that provides mortgage broking services. Headed by John Bolton. Formerly LendMe. Founded by Mark Kirkland, Marcus Morrison and Edwin Morrison of Auckland-based law firm K3 Legal. Headed by Marcus Morrison. Part of Finance Direct Group founded in 1999. Headed by managing director, Wayne Croad and technology specialist, Bob Durrant.  Part of the Southern Cross Financial Group, which was founded in 1997 and specialises in short term property finance and first mortgage investments. Headed by Luke Jackson.
Trading in P2P since Sep 2014 Nov 2015 Dec 2015 Dec 2015 Dec 2016
Types of investors Personal & institutional Personal Personal & institutional Personal & institutional Personal & institutional
Types of borrowers Personal Personal Personal & business Personal & business Personal & commercial property
Types of loans Unsecured Secured or unsecured Secured Secured Property secured
Minimum investment $25 $500 $1,000 $500 $10,000
Fractional-isation $25 lots No $1,000 lots $50 lots Yes
How investors are matched with borrowers Investors select loans individually or via their autolend criteria. Investors automatically matched with loans based on risk/return and terms. Zagga matches investors’ stated investment risk with borrowers’ credit profiles and loan requirements. Investors select loans. Investors select loans.
  Harmoney Squirrel Money Zagga Lending Crowd Southern Cross Partners
Borrowers’ personal details disclosed to investors No No Yes - to registered investors and subject to terms and conditions. No No

Terms

3 years, 5 years 2, 3 & 5 years Up to 5 years 3 years, 5 years Up to 5 years, but generally 6-24 months.
Platform makes repayments to investor on behalf of borrower if they can’t meet obligations No Yes. Squirrel pays principal and interest to investor from its Reserve Fund, provided there is money in the fund. There is currently $228,491 in the fund. No No Southern Cross Partners may choose to pay investors, but is not obligated to do so.
Secondary market available to sell loans No Yes. A fee of 1% of the loan balance transferred, up to a maximum of $50, applies. Not at the moment. No Yes. A $175 fee may apply.

In a nutshell, Harmoney - the largest and most established platform - stands out for only offering unsecured loans. This means borrowers do not have to provide an asset, like a house or car, as collateral to get the loan.

The idea is that by having the ability to invest as little as $25 in a loan, you can spread your risk across a number of different loans, so you shouldn’t be stung too badly if a borrower defaults.  

Squirrel Money is the only platform that doesn’t offer fractionalisation. To offset the fact you’re concentrating your risk, it has a fund (with a limited capacity) it will use to repay your loan and interest if your borrower defaults.

Squirrel Money is also the only platform that doesn’t cater to institutional investors, while it and Harmoney are the only two that don’t offer business loans.

Southern Cross Partners is the only platform that provides loans solely for property. It is also different in that it initially funds each loan and then offers them to investors once the loans have been drawn.

It, along with Squirrel Money, has the added benefit of a secondary market, which you can use to pass your loans on to other investors if you would like to get your money out.

Zagga’s point of difference is it provides you with the name of the borrower you’re lending money to. However there are a bunch of conditions around this and it prohibits you from contacting them.

SHOW ME THE MONEY

  Harmoney Squirrel Money Zagga Lending Crowd Southern Cross Partners
Amount lent since inception $505 million $12 million $5.6 million $15 million $34 million
Average loan size on current book $14,900 $16,000 $314,000 $21,200 $480,000
Value of loans with more than 30 days’ worth of payments in arrears against current book 9.0%* 0.4% Nil Nil 3.7%
Value of loans written off against loans written since inception 2.6% 0.6% Nil Nil Nil
Early repayment rate since inception   28% 13% 38%  
Portion of loan applications approved 21% 23% 30% 20% 30%
Portion of approved loans that get funded 99% 88% 50% 100% 100%
  Harmoney Squirrel Money Zagga Lending Crowd Southern Cross Partners
Fees 15%, 17.5% or 20% p.a. of gross interest collected, depending on size of lender’s total outstanding principal. 0.95 - 2.95% p.a. of gross loan repayments made, depending on loan’s risk grade. 0.9 - 1.95% p.a. of outstanding loan balance, depending on loan’s risk grade. 10% of gross interest collected, regardless of the size of the lender's outstanding principal. None
Range of returns (after fees, before tax) 8.8% - 19.7% 7.92% - 8.94% 5.44% - 12.79% 7.4% - 16.2% 6.25% - 8.00%
Average return on current book (after fees, before tax) 11.7% 8.54% 6.22% 11.93%  

Harmoney bigger, riskier, higher returns

At 9.0%* and 2.6% respectively, Harmoney has the highest arrears and default rates of all the platforms by a pretty large margin.

While it approves a lower portion of loans (21%) than its competitors, the fact it offers unsecured loans indicates it may be attracting a lower calibre of borrowers.

It is therefore possible a lot of its growth has come from it trawling rather than fishing for loans.

I believe this is all fair and well, provided Harmoney keeps publishing breakdowns of its default and arrears rates on its website so investors can equip themselves to make the right decisions.

Furthermore, Harmoney’s returns reflect this higher level of risk.

The average Harmoney investor is currently making a return of 11.7% before tax and after fees - more than Squirrel Money and Zagga at 8.54% and 6.22%, and on par with Lending Crowd at 11.93%.

Squirrel Money has low arrears and default rates at 0.4% and 0.6%.

While Zagga, Lending Crowd and Southern Cross Partners have told me their default rates are nil, they haven’t published a substantial amount of data on their websites for investors to get a good sense of what their loan books look like.

Being a new and fairly risky investment option, I believe P2P platforms need to maintain high levels of transparency. If you don’t see the figures you would like online - be sure to ask.

When comparing figures, it’s also worth noting a number of platforms haven’t been in business for very long, so their arrears and default rates may look quite different in two or three years’ time.

Race for loans can be tight among investors

Another feature of all the P2P platforms in New Zealand is that they don’t charge borrowers who repay their loans early.

The issue is that early repayment means that as an investor, you are missing out on interest earnings you were banking on.

Some P2P investors I have spoken to have raised their frustrations over having trouble finding loans they’re keen on after borrowers default, and spending more time than anticipated sourcing these.

Lending Crowd has the highest early repayment rate (38%) of the three platforms that provided me with this information.

With all of its approved loans getting funded, it appears investors are in a tight race for a limited number of loans.

Zagga on the other hand has an early repayment rate of only 13% and a funding rate of 50%. Yet with its average loan being $314,000 - substantially larger than Lending Crowd, Harmoney and Squirrel - it is targeting a different type of borrower.  

Squirrel Money sits somewhere in between Zagga and Lending Crowd in terms of early repayment and funding rates.


*UPDATE: Harmoney disputes this 9.0% figure, saying it represents all its arrears (IE payments even one day late), rather than just payments at least 30 days late. Interest.co.nz calculated this figure using data on Harmoney’s website, after Harmoney declined to provide comparable information. Interest.co.nz has again asked Harmoney for its 30 day arrears rate data.


In my other Generation Rent Investment Guide instalments, I have looked in to investing in property with mates and investing in funds that track the market.

*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.

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31 Comments

Wasn't Elizabeth Kerr going to give us an update on the investments she made on the p2p platform a while back?

http://www.interest.co.nz/personal-finance/75849/elizabeth-kerr-responds...
Can we get an update since this last article 2 years ago please?

I would be very keen for a follow up on this. I currently invest a small amount with them, although have had no write offs or loans in arrears, I am looking to use this to diversify my investments with eventually around 10-20k to be invested so would be very keen on some 1st hand feedback.

An_Observation.

Here is my experience with Harmoney. I started investing in June 2015 and have put in a total of $17,000. I have made 402 loans of which 80% are A grade and 20% B grade.Currently,I lend $75 on A grades and $50 on B grades. MY RAR is 10.18%. Currently,the amount in arrears is $11.38 and I have had no defaults.
I have withdrawn a total of $6,870. Of the 402 loans,some 30% have been repaid early. Overall,my experience has been positive. At times,it has been frustrating when no suitable loans were available and I have expressed my view to the company more than once,that it looked as though the wholesale lenders were being given priority. recently,I have found it much easier to relend.
This represents less than 1% of my portfolio.

Thank you for that. I too target the lower interest rate loans but have gone as low as D's and still no issues.

> At times,it has been frustrating when no suitable loans were available and I have expressed my view to the company more than once,that it looked as though the wholesale lenders were being given priority.

My feeling exactly

As your investment strategy focuses on the safer grade A and B loans, I though I'd share my experience with the high risk grades. I started investing in January 2015 and put a total of $9200 capital in. I invest only the minimum $25 in any loan I select. My original Strategy was 55% Grade D, 30% in grade E and 15% in Grade F, but as of June 2016 I no longer invest in Grade F as I found them to risky with too many defaults.
My RAR is at 15.86% which I expect to drop to around 14% long term. As you would imagine, I have experienced many defaults and as of this morning the total defaults are at $1104. This is higher than I originally anticipated, but considering the substantial interest payments received I am comfortable with this.

Fantastic article Jenee. I've been investing in the Harmoney platform since inception. At peak, I had approx 20K invested, but have decided not to reinvest repaid principal and interest so now only approx 7K tied up in the platform. My investment strategy has been relatively conservative (around 9% ROI) compared to the average ROI of the total platform. However, loan arrears have been increasing steadily and the loan equivalent of 18% of total gross interest has been written off. My feeling is that the depth of the market is not good enough for me to be able to invest with peace of mind.

"My feeling is that the depth of the market is not good enough.."

Rephrased; your feeling is you cant get any more blood out of this stone.

I put $2k in when Harmoney first started. I've got an RAR of 14%. But I'm extremely picky with the loans I choose. I choose high % loans that are usually quite small and easily serviceable against the income of the applicant, and the information provided needs to add up. So many borrowers have contradictory information in their loan applications. Avoid that and you'll avoid a lot of the write offs.

I've just been running it as an experiment, but I also feel like it gives me a good indication on borrowing, leveraging, and obviously debt repayment in the economy. I'm pretty sure it'll be like a canary in a coal mine when the economy starts to go bad. So will a lot of this debt. And some of our banks that are pouring in millions through these P2P providers will get badly burnt because I'm certain they aren't being as methodical as me with their loan choices. All loans seem to get funding rapidly, and I wouldn't touch about 80% of them with a barge pole.

Agree with some of the contradictory information provided by borrowers. Some of the incomes claimed don't really reconcile with the loan needs. Furthermore, when I see people borrowing to pay for holidays, I steer well clear. My loans written off are all on amounts around 10K and are approx 1% of the total portfolio. I've noticed loan amounts get steadily larger.

I have invested (Speculated, actually) around 5K with Harmoney. Only 36months loans and I have been VERY picky (no holidays, cars, old people, young people) nad 25$ per loan only. 15.4% return so far. Not investing anymore because quality of loans have degraded, I think the banks are sweeping up the best ones, my feeling.

yeah and the high risk loans are terrible. Losses not tax deductible! Its a heads they win tails you lose situation. If the loan does well it gets churned and you get a few percent, but if it does badly and defaults you lose. I was aslo wondering if the banks are preselecting the loans but that's pretty paranoid.

it might be paranoid or they might a guy in the office close to the toilets clicking F5 on the page all day

Only invest in these personal junk bonds if you have a high risk tolerance and invest a small proportion of your savings. You are only 1 recession away from losing your capital. It's the next finance companies

This is the correct position to take. People I've talked to about lending club in the US had their NZ level of returns reduced to 3% p.a. after the GFC. Although 3% return in the US is legendary compared with their absurd savings account returns.

People I've talked to about lending club in the US had their NZ level of returns reduced to 3% p.a. after the GFC

Oh really. I say you're probably talking nonsense. Lending Club was established in 2006. How many lenders do you know who were invested in LC prior to the GFC?

Totally agree with you here. Then when it all goes belly up these investors will be asking the government to bail them out for their losses. Even though they were expecting a free lunch while it lasted.

Also sounds like a lot of admin work just to set up the loans.

Then when it all goes belly up these investors will be asking the government to bail them out for their losses.

Will they? How much do you know about NZ P2P lenders and their belief that the govt should protect them? I call bullshit.

Us as investors are a very long way from "too big to fail". There will be no socialism of our losses. That right is reserved for the wealthy and powerful.

+1000

Agreed, if you're getting a 10% + return there's a decent amount of risk involved. P2P makes up about 5% of my net worth, I'm happy with that kind of level.

39% is loan shark territory. I'll abstain from this new form of usury thanks.

the clue is in the marketing ... Peer to Peer ... thats a tui billboard right there

I suspect most commenting on this thread don't really understand the idiosyncrasies and nuances of different P2P product models to then fully appreciate the actual risk, including the author. Glossing over key indicators and comparing them in a chart doesn't tell a complete story.

It doesn't tell a complete story, but gives you a much better overview and understanding after you have read it.

I guess its good to see everyone is a little bit more risk adverse, probably a good balance to have. However there is a few things in the article I disagree with. First off.. A lot of this sector is actually targeting bank clients that are getting taken advantage of. So all the A grade loans with Harmoney for example. I wouldnt touch the upper risk grades (15% plus) from a risk and moral standpoint, but there are a good portion of the sector that has been set up to compete with the banks, trying to do it more efficiently.

While none of the companies in NZ have traded through a recession, ones in the UK and USA have. Zopa, Lending Club and Prosper all performed well, with loans issued by lending club in the deepest darkest days (Dec-07 to July-09) having a positive return of 1.8% avg across all risk grades (lowest performed better). This doesnt look too bad when you compare that to equity markets, which halved in value. This was during a time when 15m people lost their jobs, not a bad test of a new business model. The companies operating here might not have as impressive credit models but i would think a robust analysis of the sector would include some overseas experience and comparisons to how other credit markets perform in a recession (eg credit cards.. a sector where defaults in the USA peaked at about 12% post the GFC, which is incredible given they were being pushed to anyone with a pulse). This sector (baring negligence by the company) will not be the next finance company disaster.. for that to happen (and ppl to loose 50-100% of their capital), you would have to have an end of world view of the economy looking forward.. and in that case.. go climb into a bunker with some guns and gold

I think a lot of the "low risk", low interest, high value ($50-70k) loans are actually stressed property investors. Steer clear of these. The hurt is going to get worse.

Those loans are the ones with purpose "Home Improvements" and residential status "Renting"

Harmoney's model and management are different and the next recession will also be different so you are comparing apples with oranges. The skills of Harmoney's management will be put to test during an economic downturn.
The question is, will many, if any borrowers on your portfolio keep paying off their Harmoney loans. The answer, unknown.

The only regret I have so far is not having invested speculated more