September 29, 2017
Regular readers will know I’m a fan of Peer-to-Peer (P2P) Lending.
For those unaware of how P2P Lending works, or for a refresher, check out my article called “Become A Bank With Peer-to-Peer Lending.”
The article gives a good overview of the ins and outs of this relatively new technology, and I share my experience so far.
Basically, with P2P Lending you agree to lend your money out to others, using an online platform. The credit checks and paperwork are dealt with by the online platform provider – in this case RateSetter.
My experience has been positive. And the returns are attractive, the platform easy to use (even fun), and RateSetter’s customer service is excellent.
**Note: Since writing this post, RateSetter is now called Plenti. Also, due to ASIC’s crackdown on what they term ‘financial influencers’ I am no longer able to provide referral links as originally published in this article**
Effectively, the longer you lend out your money, the higher the returns you’ll achieve.
Current interest rates (as of 24/10/2018) for lenders are as follows:
1 Month – 3% p.a.
1 Year – 4.2% p.a. (please note, the 1 year market has now been closed)
3 Year – 8.7% p.a.
5 Year – 9.8% p.a.
For 1 month and 1 year, you are paid interest monthly. Your principal will be returned to you at the end of the loan term – 1 month or 1 year.
For 3 or 5 year lending, you are paid interest monthly, and also some principal. So the loan will be paid back to you a bit each month, along with the interest.
Think of it like a mini home-loan in reverse (where you’re the bank). You can then choose to re-invest your money into a new loan, or withdraw the money to your bank account.
We have a decent sum invested on the platform, as a result of investing proceeds from a property sale last year. Our funds are spread across many different loans, and we receive payments all throughout the month.
Currently, we have it set up to ‘auto-withdraw’ on Monday each week. So basically, as loans are partly repaid to us throughout the month, the funds sit in the ‘Holding Account’ – the home of funds that have been paid back to you, or just sitting there, waiting for you to invest or withdraw.
Since I’m a famous blogger now (ha!), I decided to call RateSetter.
First of all, I told them about my experience with them, and then about my blog.
Because I was going to be recommending that folks consider trying out RateSetter for a portion of their investments anyway, and because of my happy experience, I thought we could make a deal. And we did.
RateSetter has decided to offer my readers a $100 bonus, when they signup and invest on their P2P Lending platform. They even said I would receive the same bonus, which I wasn’t expecting.
To get the bonus, you need to invest a minimum of $1000 on the platform, into the 3 year market (or longer). That’s it!
After investing, within a couple of weeks you’ll receive the $100 cash bonus into your RateSetter account.
Usually RateSetter makes the bonus payments every week or two, so you won’t have to wait too long for it!
If you lend $1000 in the 3 year market, satisfying the criteria for the cash bonus, here’s how your return looks…
$100 cash bonus.
Capital plus interest returned to you – approx $32 per month for 3 years. (3 year interest rates are currently 8.7%)
Total Return to you = $1240.
That’s a 24% return over the period
And this is if you never reinvest any of the interest or principal, so your cash invested and therefore your risk reduces each month. But if you decide to reinvest the payments, your return will be much higher than this because you have more funds on loan earning interest!
That’s not too shabby in my book!
If you’re curious, you can check out the repayment maths for my example here. As I said, think of it like a reverse home loan where you’re the bank.
If you are interested in P2P Lending maybe being a part of your portfolio, it’s a great way to test the waters.
Trying it out with $1000, will let you enjoy higher than average returns, while you’re experimenting with it. You’ll get a feel for the platform, and know whether you like P2P Lending as an investment.
Then you can then decide if you want to make it part of your investment portfolio for the longer term.
Also, like any investment, it contains risk. So before you get started, learn the nuts and bolts of how P2P Lending works, see my full overview here – Become A Bank With Peer-to-Peer Lending.
Investing for income should ideally be done in the lowest tax bracket possible. Since retiring earlier this year, we are now in very low/no tax environment, so this is not an issue for us.
Earning interest via P2P Lending, is essentially the same as interest from a bank – it’s taxable income.
So while you may earn a high rate of return in the 5 year market (9.8%), if you’re in a high tax bracket, it’s likely to end up being around 5% or 5.5% return after-tax.
Something to think about before diving in. If you have a spouse on a low to moderate income, it’s likely to be well suited to that situation.
Whatever the investment, we should make sure we aren’t losing too much of our return to tax.
Happy experimenting, happy learning and happy lending 🙂