June 1, 2017
Update: Since writing this article, RateSetter has changed its name to Plenti. If you see any reference to RateSetter, that’s why.
Peer-to-peer lending is a great example of why it’s an exciting time to be alive.
Technology is changing the way we live our lives and disrupting many old industries.
And it’s even happening in the finance industry.
These new ‘FinTechs’ as they’re called, are changing the way we borrow, shop, pay for things and even invest.
Change is the only constant as they say. So it’s best to keep an eye out for possible investment opportunities.
And one thing caught my eye a while ago, peer-to-peer lending.
Well at the risk of sounding too simple, it’s exactly as it sounds.
Peer-to-Peer Lending is an online platform where borrowers and lenders are matched up, creating loans for an agreed period of time.
Think of it like a money match-maker!
It’s a lot like opening your own banking business, where you are lending your money to other people and businesses, receiving principal and interest payments in return.
The reason this technology is effective is, by creating an online platform, the peer-to-peer lending companies can operate at a much lower cost as they don’t have to rent large buildings and shopfronts filled with employees all over the cities, like banks do.
These cost savings mean lenders earn higher returns rather than having their money in the bank. On the flip-side, borrowers can borrow at lower rates with more flexibility, compared to a traditional lender.
And the platform provider ‘clips the ticket’ on the way through and takes a fee out for matching the loans and doing credit checks on the borrowers. So each party benefits as a result of this more efficient technology.
After selling a property recently, we had a lump sum of cash that was destined for dividend-paying shares.
Although, we needed some of the money to live on and I was a bit wussy about throwing it into the sharemarket all at once.
We could have plonked it in our offset account and drip fed it into the sharemarket, but I thought I could optimise it a bit further. By using peer-to-peer lending we could earn a much higher rate than we would if the cash just sat in our offset account.
We could also use the monthly payments to live on, invest regularly in LICs and give us more flexibility over when we offload our other properties. Out of the growing number of these online platforms, I decided to go with Plenti.
For a start, they are one of the biggest peer-to-peer lending platforms in the world. They started in the UK in 2009 (as RateSetter) and opened up for business in Australia in 2014, later changing their name to Plenti.
Importantly, over that time-frame, not one lender has ever lost money.
Now, that doesn’t mean it’s a risk free investment or the returns are guaranteed. But it does mean that they have a very good track record with managing risk and approving creditworthy borrowers.
Plenti were also the first company to open their doors to all ‘Mum and Dad’ investors, letting us ‘retail’ investors in on the action.
Now anyone in Australia can get setup and start lending with only $10, which is excellent. Some peer-to-peer lending companies are only open to the big end of town and high net worth investors.
After digging around their website, I was genuinely surprised and comforted by the transparency they provide. There’s not much you can’t find on their website, but I still had some questions. So I contacted them directly, asking them a ton of stuff on the ins and outs of the platform.
Staff were very patient and took the time to answer all my questions until I was satisfied, so the customer service was a big tick.
Plenti was the first peer-to-peer lending company globally to introduce the concept of a ‘Provision Fund’.
The Provision Fund works like a safety net. As each loan is approved, the borrower is asked to pay a fee according to how risky they are deemed to be. Then, basically the fee is popped into a big security bucket called the Provision Fund.
If and when some of the loans go into default (which is inevitable with any borrower/lender situation) then the Provision Fund kicks in to cover the loss and the lender receives their regular payment and will be none the wiser.
This is no guarantee, but again Plenti has shown to be quite prudent and have plenty of coverage in the Provision Fund, helping to ensure every lender has received their principal and interest payments.
To my knowledge, they are the only Peer-to-Peer Lender in Australia with a Provision Fund in place to protect lenders.
One of the things I like about Plenti is how open they are with their data. Generally, what you see is what you get.
They make available mountains and mountains of statistics and data about loans matched, default rates, provision fund balance, amount lent, average age and income of borrowers and lenders. You get the idea.
A lot of people are pretty untrusting of financial companies (sometimes for good reason), so it’s refreshing when a finance company is open and transparent. If you like, check out their stats here.
Now the fun bit. Let’s look at how much we can make by becoming our own bank!
Here are the lending market rates as of 24/10/18.
As you can see, the interest rates are far better than the banks are offering on a term deposit. It can be a pretty effective income stream for those on lower tax brackets.
The trade off is, that your money is tied up and you can’t access it. It is lent out after all.
**Update – Plenti has now made it possible to access your money early in case of emergency, for a fee of around 1.5%. While the fee isn’t great, this is likely to prove popular with lenders who want that extra peace of mind knowing they can get the money back if needed. You can find all the details here.**
Once the monthly repayments have been made by the borrower, they become available in your Plenti holding account.
You then decide whether you reinvest some of it, all of it, or none.
You do. Well, the marketplace does.
You’re free to set your desired interest rate at whatever you’re happy to lend. But your money will only be matched if a borrower is also happy to accept that rate.
Now that’s people power in action. Borrowers and Lenders can scale up or down their desired rate they are happy to borrow/lend at.
Choose a rate too high and your money will just sit there. By meeting the market at the going rate, your money will be lent out relatively quickly. Currently, the lending rates are pretty appealing. But rates could be lower in the future if more people choose to lend money on the platform and the supply of money pushes rates down.
You will be lending to borrowers who have been approved by Plenti and deemed creditworthy. This could be individuals or businesses.
You don’t get to decide who you are lending to, which at first I wasn’t happy with. But after a while I realised it’s probably better that way.
Honestly, I’d probably over-analyse the different borrowers and try to pick the least likely to default. And it’s extremely unlikely I would do a better job than Plenti.
But there is plenty still within your control though. For example, you decide exactly how much you lend, the interest rate and how long you’re lending the money out for.
At any time, you can see the live dollar amounts of borrowers/lenders on the market. (note – this is an old picture, the 1 year market is now closed)
I was first concerned about the risk of having too much of my funds allocated to one loan, therefore perhaps being at a higher risk of losing money.
The first layer of protection is the relatively low default rates on the platform so far and the provision fund that is in place. Secondly, you can choose to lend your money out in increments if this bothers you.
If you have $5k to invest, you can lend out $1k at a time. And once you have been on the platform for a while, if you have reinvested any funds, you will end up having lots and lots of little loans.
This spreads your risk by being exposed to a diverse set of borrowers. Of course there are other risks too, which Plenti outlines for us here.
In particular, I’m interested to see how default rates hold up in a recession. Please read about the risks and make sure you’re comfortable before diving in.
Recently, it was announced that Plenti are opening up a new lending market on the platform called Green Loan. This gives lenders the ability to choose to lend to borrowers who are seeking finance to purchase ‘Approved Green Products’.
These include solar panels, low emission vehicles, energy efficient lighting plus air conditioning and a range of other things.
Currently it appears the loans will be for 3-7 years and the interest rate for lenders looks to be around 6%. The Greenie inside me is super excited about this option. Supporting clean energy and making money at the same time is a match made in heaven!
There’s more I could go into but I will leave it there for now. If there is anything you want to know more about, there is an abundance of information on the Plenti website.
For anything else, give them a call. I found them to be very helpful. Our experience with peer-to-peer lending and Plenti so far has been positive.
We have a decent amount invested on the platform and it works smoothly. We’re receiving reliable monthly repayments and a pretty solid yield.
I can’t speak for the other platforms of course. But Plenti is easy to use, offers competitive rates, good transparency, flexibility, customer service and even a safety net in the Provision Fund.
It’s far from risk free, but I do believe it can play a part in an investment portfolio. Remember, you can start with a tiny amount, see if you like it and go from there. Starting a business with $10 is a nice option. Especially one that will be earning positive income from day one!
One thing I will say is, it sure is nice to be on the other side of the banking table. It’s nice to be the bank for once 🙂
So if you’re interested, you can open your very own lending business today! If you have any questions about peer-to-peer lending or Plenti, leave a comment and I’ll do my best to answer it.