Peer to peer (P2P) lending platforms help connect everyday borrowers with investors without getting the banks involved.
As an investor, you can lend your money via a P2P platform and earn a higher return than what you'd normally get from savings accounts, term deposits and other investments, but with a different risk profile.
This guide is for investors looking to lend money on a peer-to-peer loan platform. If you're looking to take out a peer-to-peer loan, you can read our P2P borrowing guide instead.
Disclaimer: Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
How does P2P investing work?
When you invest with a P2P lending platform your money forms part of a loan which is offered to borrowers on the platform.
If your money is lent out, you'll receive a return in the form of interest charged on the loan.
P2P lenders usually offer a number of different investment options, with various estimated interest rates, risk levels and loan terms from a few weeks to several years. You may also have the option of investing in different types of loans.
There is normally a minimum investment amount, but this can range from as little as $10 to more than $500,000 depending on which platform and type of loan you want to use.
Most P2P platforms will use your money to fund a few different loans and a single loan will typically be made up of money from multiple investors. This helps to diversify investor's portfolios and spread out the risk of a borrower defaulting on their loan.
Some P2P lenders will let you loan out larger amounts to an individual borrower or put up the entire amount for a single loan if you think you can get a larger return on investment that way.
While borrowers are pre-screened for financial stability and the ability to repay the loan, there's still the possibility that they may default on the loan, which means you could get no return or even lose money when you invest with a P2P platform. Unlike a regular savings account, there's also no government guarantee on any money you lend out via a peer-to-peer lender.
What are the benefits of P2P investing?
Better potential returns. Many P2P lenders offer returns that are typically much higher that what you'd get if you kept your money in a high interest savings account or term deposit.
Diversification. P2P investing can help diversify your overall investment portfolio and risk profile
Helping others. You may also be helping someone get a loan who would otherwise struggle to be approved with a traditional lender.
Multiple investing options. Investors usually get a broad range of options to suit your personal appetite for risk and financial goals, including secured and unsecured loans, and different repayment terms.
Streamlined process. Many P2P sites have made it very simple to invest by handling the paperwork, legal documentation and credit records as well as automated monitoring of loans in your portfolio.
What are the risks of P2P investing?
There are a few key risks involved when you invest with a peer-to-peer lending platform:
Borrower default or late payment. This is one of the biggest risks for P2P investors. If a borrower doesn't repay their loan, any money you've lent may be at risk. If a loan cannot be repaid, you may only be able to recover some (or none) of your investment. Some P2P lending platforms may offer certain protections for investors in the event of this occurring.
No government protection. Unlike a regular bank account, there is no government guarantee on any funds you invest via a P2P lender.
Your funds may be locked. Once your money has been lent out you may be unable to access them until the loan term is complete. If you're likely to need access to the funds in the near-future, you may not want to invest them on a P2P platform.
Interest rate changes. As with any fixed term deposit or loan, interest rates may increase after you've lent out money, which means you may end up missing out on higher returns from using a savings account. While this is not necessarily an investing risk, it's something you should consider before committing your funds to a lending platform.
Platform risk. If the P2P platform you use goes out of business, you may be unable to withdraw your funds. In the case of bankruptcy, you'd potentially become a creditor and have your funds tied up until the bankruptcy is resolved.
No return. Despite the advertised interest rate, there is no guarantee that you will actually get any return on your investment.
Inconsistent credit ratings. The credit ratings given by the P2P operator to loans may be misleading because there's no standard across operators or external rating agencies.
How do I choose which P2P lender to invest with?
There are a variety of peer to peer investment sites to choose from, offering a diverse range of features for investors.
Here are some of the features you might want to consider:
Minimum investment amount
Advertised and historical interest rates
Risk profile
Investment terms and options
User reviews
P2P lenders operating in Australia are required to hold an Australian Financial Services Licence (AFSL), which means they're legally obliged to lend responsibly and conduct safety and security checks on borrowers.
However, make sure to check with the Australian Securities & Investments Commission (ASIC) to see if a specific lending platform has the relevant AFSL licence before signing up as an investor.1
Is my money protected?
It's important to remember that although peer to peer operators are required to follow certain rules to better protect customers, there's never a guarantee that your money is safe.
At a minimal level, peer-to-peer operators in Australia are required by ASIC to conduct background checks on all borrowers before offering them a loan. This may include checking bank statements and government verification services.
Some operators, such as Plenti, have additional securities in places, such as a protection fund which is used to compensate investors.
In the case of Plenti, part of the interest charged to borrowers is transferred to its Provision Fund, while riskier borrowers will pay a higher fee which also goes into the fund. If borrowers default, investors will be compensated for all or some of their losses. Of course, an investor could still lose money in the case of heavy losses, but the impact will be minimised.
Getting started as a P2P investor
This is a checklist of things you should consider once you're ready to lend money on a P2P platform:
Understand the investment: Read the product disclosure statement (PDS) and Financial Services Guide (FSG) first where relevant.
Security: Look at the loan's security status and determine if it is unsecured or secured.
Minimum investment: The minimum amount you can invest ranges from around $10 to over $500,000 depending on which operator you choose.
Interest rate: Who calculates the interest rate and what factors determine the rate?
Choice of loans: Are you able to choose who you borrow from or lend to? Can your investment be spread over multiple loans? (This may reduce the risk of losing all your money.)
Repayments: When will you start to reap the benefits?
Getting your money back: Do you have the flexibility to change your mind and still retain cooling off rights? If you pull out, can you get your money back? What would you do if the borrower pulls out? What steps will the company take to recover your investment?
What if the platform fails?: Be prepared in all scenarios. If the company does go under, do you know the steps you'll take to recover your money?
Fees: You need to know if any fees go to the operator of the platform and if fees exist for investments and repayments.
Like all providers that offer consumer loans, P2P platforms must lend responsibly to ensure the investor doesn't lose money. As an investor, you should conduct your due diligence before signing up and compare different options to find the right one for your needs.
Depending on your area of expertise, you might choose to invest mostly in business loans, mostly in personal loans, or across both.
If you want to be more discerning, you can even focus specifically on borrowers you believe have a smart business plan and a bright future, and invest similarly to how you would with a share trading account.
Frequently Asked Questions
Yes, peer-to-peer lending is perfectly legal for both borrowers and investors in Australia, provided the lending platform has the relevant AFSL licence.
P2P investing returns are typically around 5%-20% and can be higher than the interest rates offered on term deposits and savings accounts.
Yes, any return you receive from P2P investing would be considered taxable income and would need to be declared on your tax return.3
Investments made through a P2P lending platform are not protected and are subject to risks including credit risk (defaults) and liquidity risk. These investments are not subject to review by the Australian Financial Complaints Authority. Actual returns may vary from the Expected Returns declared by the Providers. Read the PDS for details before investing and consider your own circumstances, or get advice, before investing.
Kylie Purcell is the senior investments editor and analyst at Finder. She has completed a Certificate of Securities and Managed Investments (RG146) and specialises in investment products including online brokers, robo-advisors, stocks and ETFs. See full bio
Kylie's expertise
Kylie has written 134 Finder guides across topics including:
Tom Stelzer is a publisher and writer for Finder, covering investing and cryptocurrency.
He previously worked for Finder as a writer in Australia and the UK, covering things like personal finance, loans, investing, insurance as well as small business and business loans.
He has a Master of Media Arts and Production and Bachelor of Communications in Journalism from the University of Technology Sydney. See full bio
Try to take a look at P2PLendingSites.com. On that site, I was able to find quite a few P2P investing platforms which make a return that is higher than 10% p.a.
I use both Mintos and Crowdestate myself (as they work for Australia), but I recommend that you compare and find your own preferred platforms on the mentioned site.
Also, do yourself the favor of making your own research before investing any money!
Cheers,
Joey
ValJuly 11, 2017
I’m looking for investment making equal or higher 10% p.a.
JonathanJuly 13, 2017
Hi Val!
Thanks for your comment. :)
Most investments that can suit your goal can take a high level of risks such as lending and stocks/shares.
As such, you may consult a financial adviser for a more comprehensive analysis of your goals. If you wish to learn more, please read our guide on the benefits of seeking financial advice.
Hope this helps.
Cheers,
Jonathan
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Hey Val,
Try to take a look at P2PLendingSites.com. On that site, I was able to find quite a few P2P investing platforms which make a return that is higher than 10% p.a.
I use both Mintos and Crowdestate myself (as they work for Australia), but I recommend that you compare and find your own preferred platforms on the mentioned site.
Also, do yourself the favor of making your own research before investing any money!
Cheers,
Joey
I’m looking for investment making equal or higher 10% p.a.
Hi Val!
Thanks for your comment. :)
Most investments that can suit your goal can take a high level of risks such as lending and stocks/shares.
As such, you may consult a financial adviser for a more comprehensive analysis of your goals. If you wish to learn more, please read our guide on the benefits of seeking financial advice.
Hope this helps.
Cheers,
Jonathan